World Economic Situation and Prospects 2013: Global Economic Outlook 2012-2014
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Latest report (available at bit.ly/wesp) shows that growth of the world economy has weakened considerably during 2012 and is expected to remain subdued in the coming two years. The global economy is expected to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014, a significant downgrade from the UN’s forecast of half a year ago.
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World Economic Situation and Prospects 2013: Global Economic Outlook 2012-2014
- 1. WESP 2013 Global Outlook 2012-2014 Rob Vos December 18, 2012 New York www.un.org/esa/policy
- 2. Main messages 1. Renewed global economic slowdown • Much of Europe mired in recession - trapped in vicious circle of debt, low growth and high unemployment • Considerable slowdown worldwide (incl. emerging economies) • Jobs crisis continues 1. High risk of downward spiral into new global recession • Escalation of euro area crisis • Fiscal cliff in the United States • Hard landing in China & other emerging economies 3. Breaking out of the vicious cycle • Shift away from self-defeating fiscal austerity • Redesign fiscal policies to support job creation & green growth • Coordinate monetary policy & accelerate financial sector reforms • Enhance development financing 2
- 3. Slowdown in baseline with significant downside risks, but hopes for benign rebalancing with coordinated policies
- 4. A synchronized global slowdown… 10 8 6 Developing Economies 4 2 Economies in Transition 0 Developed Economies -2 -4 -6 -8 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 4
- 5. Feeble policy efforts to break out of Vicious Cycle
- 6. The jobs crisis continues: no employment recovery before 2017 at going trends
- 7. Developed country weaknesses are spilling over Global trade growth More capital flow volatility has slowed markedly for developing countries
- 8. Impact of downside risks on world economy will be substantial 8
- 9. How to get the world economy back on track? •Present policy stances insufficient and source of uncertainty Fundamental policy shift is required: •Coordination of fiscal policy new growth impulses •Redesign fiscal and structural policies job creation & green growth •Monetary policy coordination less capital volatility •Accelerate financial regulatory reform reduce financial fragility •Ensure adequate development finance benign rebalancing and achieving MDGs 9
- 10. Coordinated strategy for growth and jobs can lift all boats Employment in Europe and US will recover by 2014 and 33 million more jobs per year in developing countries
- 11. www.un.org/esa/po licy
Editor's Notes
- I am pleased to launch today the first chapter of our UN flagship report “World Economic Situation and Prospects 2013”, in which we present the global economic outlook. Our analysis illustrates how - four years after the eruption of the global financial crisis - the world economy continues to struggle with the post-crisis adjustments. Growth of world gross product slowed considerably from 2.7% in 2011 to just 2.2% in 2012. The prospects for the coming years continue to be disappointing, with global output forecast to grow by 2.4% in 2013 and 3.2% in 2014 – a pace well below potential, which implies a much slower pace of poverty reduction in many developing countries and a narrowing of fiscal space for investments in education, health, basic sanitation and other critical areas needed for accelerating progress towards the Millennium Development Goals (MDGs).
- The main messages of the WESP Global Outlook come in three parts: Current Situation: A growing number of developed economies have fallen into double-dip recessions and others are stuck in low growth. Much of Europe is trapped in a vicious cycle of debt, financial fragility, fiscal austerity and high unemployment. At the same time, growth in the major developing countries and economies in transition, especially Brazil, China and India, has slowed significantly over the past year. This reflects both negative spillover effects from the weakness in developed economies (weaker export demand, increased volatility in capital flows and commodity prices) and domestic challenges. The recent slowdown and the subdued growth prospects also mean that we are not seeing any progress regarding the global jobs crisis. 2. Major Risks: While the UN baseline forecast projects sluggish growth in the years ahead, there is also a high risk of a downward spiral that leads the world economy into a new recession. In our analysis, we have highlighted three major risk factors, which pose a threat to global growth – an escalation of the euro area crisis, the fiscal cliff in the United States and a hard landing in China and other emerging economies. 3. The third message we want to convey is mainly addressed to policymakers. We believe that to break out the vicious cycle, a fundamental policy shift is needed. This requires more forceful and concerted policy action at the global level on various fronts: Policies must move away from self-defeating fiscal austerity toward fiscal policy oriented at job creation and green growth; better coordination of monetary policies is needed and more stringent financial sector reforms. And, in light of the severe implications of the global growth slowdown for progress towards attainment of the MDGs, we need to ensure that sufficient resources are made available to developing countries, especially those possessing limited fiscal space and facing large development needs.
- Let me now provide some more details regarding the key points raised in the global outlook of WESP 2013. This graph shows our baseline forecast– the dotted blue line – based on the World Economic Forecasting Model. The chart illustrates the ongoing growth slowdown and the fact that despite the expected moderate recovery in 2014, global growth will remain well below the pre-crisis pace. The chart also shows the pessimistic/downside scenario (in light brown), which assumes that euro area crisis deteriorates, that US policymakers fail to avert the fiscal cliff and that most large developing countries see a hard landing in 2013. In this downside scenario, global economic activity is projected to stagnate in 2013, with only a subdued recovery in 2014. Finally, the chart also includes an optimistic scenario (in green), which is based upon a shift in macroeconomic policies around the globe as part of an internationally concerted agenda. We have simulated such a coordinated policy scenario with the UN Global Policy Model (GPM). According to the results of this policy scenario, global growth would rebound and return to a pace similar to the one seen before the crisis in 2008/09.
- This chart illustrates that the slowdown has been synchronized across the major world regions. Among developing countries, growth in East Asia, South Asia and Latin America and the Caribbean weakened significantly in 2012 as the regional heavyweights China, India and Brazil saw a sharp slowdown. One notable exception to the overall trend is Africa, where growth in 2012 was stronger than in 2011 as some economies, especially in North Africa, recovered from conflict and political turmoil.
- This chart illustrates the vicious cycle many developed economies are caught in and the insufficient policy responses that have been undertaken so far. First of all, unemployment has increased staggeringly and is still on the rise; this is both cause and effect of the lack of economic recovery. Second, the weak economy has compounded financial fragility. Banks, firms and households have moved from excessive leverage to deleveraging, which is holding back normal credit flows and consumer and investment demand. Third, the fiscal austerity responses to deal with rising public debts are further deterring economic growth, which in turn is making a return to debt sustainability all the more difficult. And fourth, bank exposure to sovereign debts and the weak economy are perpetuating financial sector fragility, which in turn is spurring the continuous deleveraging. Governments of developed countries continue to struggle to break through this vicious circle as t he policy focus so far has been placed on repeated rounds of monetary expansion and announcements of structural reforms. Structural reforms at best will have a gradual effect on growth, leaving basically one accelerator to restore growth. At the same time policy makers are putting brakes on growth through other means. Austerity measures prevail on the fiscal front, while many structural reforms are having the short-term effect of weakening so-called automatic stabilizers. Measures are also being taken to help repair the financial system but regulatory reforms are slow and obstacles in implementing them are adding uncertainties. More generally, the credibility of policies is in question in many developed countries and a good deal of policy uncertainty remains (such as in the United States). With only one accelerator and three brakes it seems difficult to break out of the vicious cycle and the risk for the global economy to slip into another recession thus remains unabatedly high.
- I have already pointed out that the global jobs crisis continues. And this chart shows that a full recovery of employment levels is still far away, particularly in the Euro area, where the unemployment rate reached a record high in 2012. Based on projections from our partners at the International Labour Organization, at the end of 2016, total employment in the euro area will still be 2 percentage points below the pre-recession peak. The outlook is slightly more positive for other developed economies, including the United States. However, while the US unemployment rate has started to come down in recent months, the participation rate dropped to a new low in 2012, and the share of long-term unemployment (those unemployed for more than six months) reached a historical high of about 40 per cent, well above the peak of 25 per cent in any of the post-World War II recessions.
- In the course of 2012, the economic woes of developed economies have increasingly spilled over to developing countries and economies in transition. The two main channels through which these economies were affected are weaker export demand and increased volatility of capital flows (and commodity prices). As an engine of growth, international trade promotes global growth in good times, but it also transmits weaknesses from country to country in bad times. The further slowdown in world trade growth in 2012 - shown in the chart on the right - reflects declining import demand in many European economies, but also a sharp deceleration in much of East Asia, including China. Together with subdued demand in the United States, these weaknesses are creating negative feedback loops, leading to a synchronized downturn in world trade and global output. At the same time, the combination of massive monetary expansion in developed economies and rapidly changing investor sentiment (risk perceptions) has led to heightened capital flow volatility for developing countries, illustrated in the chart on the left. Over the past few years, we have seen several waves of massive capital inflows, followed by large capital outflows as global macroeconomic and financial conditions have remained highly uncertain.
- As already alluded to earlier, there are substantial downside risks for the world economy. This chart looks separately at the three major risks analyzed in the report. According to our estimates, based on the World Economic Forecasting Model, the fiscal cliff would have the strongest impact on global growth (However, I should note here that for the euro area crisis, we have estimated the effect of a deepening of the crisis and not a full-fledged breakdown of the common currency). Importantly, for developing economies, the risks associated with a hard landing in China are the greatest.
- With these major risks in mind, the question is what can policymakers around the globe do to get the world economy back on track. The present policy stances are clearly insufficient and have further increased uncertainty, rather than reducing it. We highlight five different areas, where a fundamental policy shift is required: First, fiscal policy stances will need to be changed to provide new growth impulses and this needs to coordinated internationally. The second and related challenge for all countries will be to redesign fiscal policy—and economic policies more broadly—in order to strengthen the impact on employment and promote structural change for green, and thus, more sustainable economic growth. Third, monetary policy actions need to be better coordinated to ensure that capital flows, especially to developing countries and economies in transition are less volatile. Fourth, efforts to implement financial regulatory reform need to be stepped up in order to reduce financial fragility. And fifth, we need to ensure that adequate development finance is made available for countries possessing limited fiscal space and facing large development needs. These resources will be needed to accelerate progress towards the achievement of the Millennium Development Goals (MDGs) and for investments in sustainable and resilient growth, especially for the LDCs.
- The alternative scenario, based on the agenda outlined above, includes a shift in fiscal policies away from austerity and towards more job creation through, inter alia, more spending on infrastructure; energy efficiency, social programmes and tax and subsidy measures to stimulate private investment projects in these areas; continued expansionary monetary policies aligned with stronger capital account regulation to stem capital flow volatility; and enhanced development assistance to the poorest nations. The UN Global Policy Model simulations show that under such a policy scenario, WGP would grow at an average rate of 4.5 per cent between 2013 and 2017, public debt-to-GDP ratios would stabilize and start falling from 2016 or earlier. Employment levels in major developed countries would gradually increase and return to pre-crises levels in absolute terms by 2014 and by 2017 after accounting for labour force growth. The employment recovery thus would come much sooner than in the baseline, although remaining protracted even with the suggested internationally concerted strategy for growth and jobs. An additional 33 million jobs per year on average would be created in developing and transition economies between 2013 and 2017.