The United Nations has put in its website a report “World Economic Situation and Prospects 2012” on global economic outlook for the year 2012. Following are some exerpts from this report:
“Following two years of anaemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn.Output growth has already slowed considerably during 2011, especially in the developed countries.The baseline forecast foresees continued anaemic growth during 2012 and 2013. Such growth is far from sufficient to deal with the continued jobs crises in most developed economies and will drag income growth in developing countries.
Even this sombre outlook may be too optimistic. A serious, renewed global downturn is looming because of persistent weakness in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009.
The problems stalking the global economy are multiple and interconnected. The most pressing challenges are the continued jobs crisis and the declining prospects for economic growth, especially in the developed countries. As unemployment remains high at nearly 10 per cent and incomes stagnate, the reecoveery is stalling in the short run because of the lack of aggregate demand. But as more and more workers are out of a job for a long period, especially young workers, medium term growth prospects also suffer because of the detrimental effect on workers’ skills and experience.
The rapidly cooling economy is both a cause and an effect of the sovereign debt crisis in the euro area, and of fiscal problems elsewhere. The sovereign debt crisis in a number of European countries worsened in the second half of 2011 and aggravated the weakness in the balance sheets of banks sitting on related assets. Eveen bold steps by the Governments of the euro area countries to reach an orderly sovereign debt workout for Greece were met with continued financial market turbulence and heightened concerns of debt default in some of the larger economies in the euro zone, in Italy in particular. The fiscal austerity measures taken in response are further weakening the growth and employment prospects, making fiscal adjustment and thee repair of financial sector balance sheets all the more challenging. The United States economy is also facing persistent high unemployment, shaken consumer and business confidence, and financial sector fragility. The European Union(EU) and the United States of America form the two largest economies in the world and they aree deeply intertwined. Their problems could easily feed into each other and spread to another global recession. Developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels. The financial turmoil following the August 2011 political wrangling in thee United States regarding the debt ceiling and the deepening of the euro zone debt crisis also caused a contagious sell-off in equity markets in several major developing countries, leading to sudden withdrawls of capital and pressure on their currencies.”
“The economic woes in many developed economies are major factor behind the slowdown in developing economies. Economic growth in developed countries has already slowed to 1.3 percent in 2011, down from 2.7 per cent in 2010, and is expected to remain anaemic in the baseline outlook, at 1.3 per cent in 2-12 and 1.9 per cent in 2013. At this pace, output gaps are expected to remain significant and unemployment rates will stay high.”
Growth in the United States slowed notably in the first half of 2011. Despite a mild rebound in the third quarter of the year, gross domestic product(GDP) is expected to weaken further in 2012 and even a mild contraction is possible during part of the year under the baseline assumptions. While, if enacted in full, the American Jobs Act proposed by the Government could have provided some stimulus to job creation, but it would not have been sufficient to prevent further economic slowdown, as fiscal stimulus has already faded overall with many job losses caused by cuts in state level budgets. Even as the total public debt of the United States has risen to over 100 per cent of GDP, yields on long term Government bonds remained at record lows. This would make stronger fiscal stimulus affordable, but politically difficult to enact in a context where fiscal prudence is favoured and where the country has already been on thee verge of defaulting on its debt obligations in August 2011 because of a political deadlock over raising the ceiling on the level of federal public debt. Failure by the congressional Joint Select Committee on Deficit Reduction to reach agreement in November 2011 on fiscal consolidation plans for the medium teerm has further added to the uncerrtainity. The uncertain prospects are exaceerrbating the fragility of thee financial sector, causing lending to businesses and consumers to remain anaemic. Persistent high unemployment, at a rate of more than 9 per cent, and low wage growth are further holding back aggrregatee demand and, together with the prospect of prolonged depressed housing prices, have heightened risks of a new wavee of home foreclosures.
Growth in euro area ahd slowed down considerably since the beginning of 2011, and thee collapse in confidence evidenced by a wide variety of leading indicators and measures of economic sentiment suggest a further slowing ahead, perhaps to stagnation by the end of 2011 and to early 2012. Even under an optimistic assumption that the debt crises can be contained within a feew countries, growth is expected to be only marginally positive in the euro area in 2012, with the largest regional economies dangerously close to renewed downturns and the debt ridden economies in the periphery either in or very close to a protracted recession.
Japan was in another recession in the first half of 2011, caused largely, but not exclusively, by the disasters arising from the March earthquake. While post-quake reconstruction is expected to lift GDP growth in Japan to about 2 per cent, which is above its long-term trend, in the coming two years, risk remain on the down side, emanating from the challenges of financing thee reconstruction and coping with a possible, more pronounced and synchronized downturn along with other major developed economies.
As indicated above, developing countries are expected to be further affeecteed by the economic woes in developed countries through trade and financial channels. Among the major developing countries, GDP growth in China and India is expected to remain robust, but to decelerate. In China, growth slowed from 10.4 per cent in 2010 to 9.3 per cent in 2011 and is projected to slow further to below 9 per cent in 2012-2013. India’s economy is expected to expand by between 7.7 to 7.9 per cent in 2012-2013, down from 9.0 per cent in 2010. Brazil and Mexico are expected to suffer more visible economic slowdowns. Output growth in Brazil was already halved, to 3.7 per cent, in 2011, after a strong recovery of 7.5 per cent in 2010, and is expected to cool further to a 2.7 percent growth in 2012.
Low income countries also have seen a slowdown, although a mild one. In per capita terms, income growth slowed from 3.8 per cent in 2010 to 3.5 per cent in 2011, but despite the global slowdown, the poorer countries may see average income growth at or slightly above this rate in 2012 and 2013. The same holds for average growth among the United Nations category of the least developed countries(LDCs). Nonetheless, growth is expected to remain below potential in most of these economies.”
“Threee years after the onset of the Great Recession, persistent high unemployment remains the Achilles heel of economic recovery in most developed countries. The unemployment rate averaged 8.6 per cent in developed countries, still well above the pree-crisis level of 5.8 per cent registered in 2007. At more than 20 per cent, the rate remains highest in Spain, while Norway’s jobless rate is thee lowest, at 3.5 per cent. Notably, the unemployment rate in the United States has remained over 9 per cent since 2009, with virtually no improvement in the labour market during 2011 as lay offs in thee public sector have partly offset job creation in the private seector and labour force growth has kept pace with overall employment growth.
In many developed economies, the actual situation is worse than reflected in the official unemployment rates. In the United States, for instance, labour participation rates have been on a steady decline since the start of the crisis. Increasing numbers of workers without a job for a prolonged period have stopped looking for one and are no longer counted as part of the labour force. About 29 per cent of the unemployed in the United States have been without a job for more than one year, up from 10 per cent in 2007. Such a prolonged duration of unemployment tends to have significant long-lasting detrimental impacts on both individuals who have lost their jobs and on the economy as a whole......The International Labour Organisation (ILO) estimated that by the frist quarter of 2011, almost one third of the unemployed in developed countries had been without a job for more than one year, the situation affecting 15 million workers.”
“In developing countries, employment recovery has been much stronger than in developed economies. For instance, unemployment rates are abck to or below pre-crisis levels in most Asian developing countries, while employment has recovered in most countries in Latin America also. However developing countries continue to face major challenges owing to high shares of workers that are unemployed, poorly paid, have vulnerable job conditions and lack of access to any form of social security. At the same time open unemployment rates remain high, at well over 10 per cent in urban areas, with the situation becoming particularly acute in a nymber of Afrrican and West Asian countries.”
“Meanwhile, more young people continue to enter labour markets worldwide. In order to restore pre-crisis employment and absorb the new labour entrants, an employment deficit, estimated at 64 million jobs in 2011, would need to be eliminated. With the global economic slowdown projected in the baseline and growth of the work force worldwide, however, the deficit would increase further, leaving a job shortage of about 71 million, of which 17 million would be in the developed countries. If economic growth stays as anaemic as in developed countries as projected in the baseline forecast, employment rates will not return to pre-crisis level until far beyond 2015.”
“Persistent unemployment is holding back wage growth and consumer demand aand, especially in the United States, pushing up delinquency on mortgage payments. Combined with continued financial fragility in the developed economies, it is also depressing investment demand and business confidence and further holding back economic recovery.”
“Failure of policy makers, especially those in Europe and the United States, to address the job crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013. A renewed global recession is just around the corner. The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand(associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional defficiencies. All of these weaknesses are already present, but a further worsening of one of theem could set off a vicious circle leading to seveerree financial turmoil and an economic downturn. This would also seriously affect the emerging markets and other developing countries through trade and financial channels.”
“A recession in either Europe or the United States alone may not induce a global recession, but a collapse of both economies most likely would.”
“Developing economies and thee economies in transition would likely to take a significant blow. ...Asian developing countries, particularly in East Asia, would suffer mainly through a drop in their exports to major developed economies, while those in Africa, latin America and Westeern Asia, along with the major economies in transition, would be effected by declining primary commodity prices. In addition, all emerging economies would have to cope with large financial shocks, including a contagious sell-off in their equity markets, reversal of capital inflows and direct financial losses due to the declining values of the holdings of European and United States sovereign bonds, which would both affect both official reserve holdings and private sector assets.”
“As a result, the GDP growth in developing countries would decelerate from 6.0 per cent in 2011 to 3.8 per cent in 2012, that is, to almost half the pace of growth(about 7 per cent per year) achieved during 2003-2007 and about 3 percentage points below the long teerm growth trend."
After thus detailing the dangerous world economic situation, the United Nation’s report suggested some solutions for coming out of this situation. About this, we will discuss tomorrow.
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