I am pleased to present United Nations World Economic Situation and Prospects 2012, a joint product of UN/DESA, UNCTAD and the five regional commissions. The core message is that we are at the brink of a new global recession. Our baseline forecast shows a clear deceleration of the world economy and assumes we may “muddle through” at a slower pace but with continued high unemployment. Risks are increasing, however, that we may be heading towards a new global recession.
The world economy is at a critical juncture. The momentum of the global growth is faltering at an alarming rate, with heightened risks for some major developed economies to slide into a double-dip recession in 2012, dragging the rest of the world into another dire economic downturn. The most threatening risks for the global recovery emanate from the weaknesses in the major developed economies. The sovereign debt crisis in a number of European economies is deteriorating, aggravating the still fragile banking sector in the region, propagating the distress to a growing number of other economies and triggering a renewed financial turbulence worldwide. The fiscal and financial woes, combined with elevated unemployment, widening income inequality and a flagging economic growth, are posing formidable challenges for policy makers in major developed economies. However, a pervasive and deepening political divide in these countries regarding how to tackle these challenges has paralyzed otherwise a much urgently needed policy action, further eroding the already shattered confidence of businesses and consumers. To save the global economy from falling into a dangerous downward spiral, policymakers worldwide, and those in major developed economies in particular, should take swift and concerted action, giving greater priority to revitalizing the recovery in output and employment in the short run.
The prospects for the world economy in 2012 are seriously grim, surrounded by great uncertainties. Growth of world gross product (WGP) is forecast to be 2.6 per cent in the baseline outlook for 2012 and 3.2 in 2013, a sharp downgrading from the 3.6 per cent projected in the WESP update of mid-2011. Global output already slowed to 2.8 per cent in 2011, down from the rebound of 4.0 per cent we had seen in 2010 The baseline is premised on a set of assumptions that in the light of most recent events may already seem optimistic. It assumes that the sovereign debt crisis in Europe can be contained to a few small economies only. It does consider the fiscal austerity measures that are being enacting across most major developed economies. It also considers that the US super committee would not come to agreement and that set of fiscal cuts will be enacted from January 2013 onwards. The baseline does assume, however, that the payroll tax cuts and emergency unemployment benefits will be extended. This is not certain: if that would not happen, the GDP growth in the US would only be 1% in 2012, instead of the baseline forecast of 1.7 per cent, which is already lower than most other forecasts. Growth in developing countries would also slow to 5.6 per cent in 2012 (almost 2 percentage points less than in 2010). Most importantly, in this muddling through scenario, little would be done to make up for the 64 million jobs deficit left by the crisis. If the pace of recovery would continue like that, we should not expect employment levels to be back up until well beyond 2016. This holds for developed countries in particular. The problem is that the continued jobs crisis is holding back the recovery and that in turn is complicating fiscal problems and keeping up public debt ratios.
But things may turn for the worse. The policy shift towards greater fiscal austerity, in part in response to the sovereign debt problems, has in fact weakened aggregate demand. Europe’s policy response to Greek’s debt crisis has been political difficult and hence protracted. While some seemingly bold actions have been taken, they have come late and have not been bold enough. Markets have been little impressed and pushed up government borrowing costs even more The debt problems are now also threatening bigger countries to go under, Italy in particular, the world’s seventh largest economy. This would augur for a more messy workout as long as the EU and eurozone don’t show greater and much more forceful resolve. It would also spill over into a renewed banking crisis and further financial turmoil worldwide. Also, if in the US the political wrangling over the debt ceiling ends in more fiscal austerity, developed countries would enter into a recession for sure, pulling down the global economy at large. Developing countries would then also see their economic growth suffer significantly, shaving off another 1.5 to 2 percent of their income growth and that would cause further setbacks in progress towards poverty reduction and achievement of the other MDGs.
Overcoming the risks outlined above and reinvigorating the global recovery in a balanced and sustainable manner poses enormous policy challenges. Most developed economies—Europe and the United States, as well as Japan—find themselves in a difficult economic bind. There are no simple solutions that would quickly win political support. Their economies have been growing too slowly for too long, making it more and more difficult to pay for the increasing costs of health care and pensions for ageing populations. Developing countries find themselves in a different bind. On the one hand, they need to protect themselves against volatile commodity prices and external financing conditions, in some cases through more restrictive macroeconomic policies and reserve accumulation, thereby contributing to the lack of global aggregate demand. On the other hand, they need to step up investment to sustain higher growth and reorient their economies towards faster poverty reduction and more sustainable production. The G20 Cannes Action Plan does not promise to do much more than what is already in government plans in the short run and as the baseline projections show, would fall short of reinvigorating the world economy and bringing down unemployment. Most hopes seem to be set on strengthening the medium-term foundations for growth, but they may fall well behind the curve if the downside risks play out. Instead, what is need is a much greater focus on measures that can confront the jobs crisis more directly, which will require more, not less fiscal stimulus in the short run, especially by those economies with sufficient fiscal space (which includes many of the major developed countries) to push up aggregate demand and through that also aid countries with less fiscal space. This should be the immediate focus of more forceful international policy coordination. Without reinvigorating the recovery and reducing unemployment, any plans for medium-term fiscal consolidation will be quickly deemed ineffective and hence not credible and thus is source of continued financial turmoil. Developing countries are affected by highly volatile commodity and capital markets. They continue to respond by accumulating more reserves as a form of self-insurance. While understandable it comes with a cost and is limiting finance available for long-term developmental investment. Hence further reforms of global liquidity and the reserve system are needed.
In such a more optimistic scenario of more fiscal stimulus in the short run oriented at creating jobs through direct employment incentives, investment in infrastructure and green growth, which is coordinated internationally, a more benign outcome is possible with the world economy growing at 4 per cent, recovering the employment deficit left by the global crisis, and moving towards fiscal consolidation and debt reduction over the medium run.
World Economic Situation and Prospects, 2012 Global Outlook Pre-Launch New York, 1 December 2011 Rob Vos United Nations www.un.org/esa/policy
Main messages <ul><li>The world economic is at a critical juncture </li></ul><ul><ul><li>Risk of double-dip in major developed economies </li></ul></ul><ul><ul><li>Growth in emerging economies is moderating </li></ul></ul><ul><li>Downside risks and uncertainties </li></ul><ul><ul><li>Contagion of sovereign debt crisis, combined with fragility in banking sector </li></ul></ul><ul><ul><li>Persistent high unemployment </li></ul></ul><ul><ul><li>Political tensions leading to policy paralysis </li></ul></ul><ul><li>3. Policy challenges </li></ul><ul><ul><li>No premature fiscal austerity, rather more short-term stimulus is needed </li></ul></ul><ul><ul><li>… internationally coordinated </li></ul></ul><ul><ul><li>… focused on job creation and investments towards medium term reforms </li></ul></ul><ul><ul><li>Bolder actions to deal with financial fragilities </li></ul></ul><ul><ul><li>More stable development financing aligned with reforms of financial system </li></ul></ul>
<ul><ul><li>No premature fiscal austerity, rather more short-term stimulus is needed </li></ul></ul><ul><ul><li>… internationally coordinated </li></ul></ul><ul><ul><li>… focused on job creation and investments towards medium term reforms </li></ul></ul><ul><ul><li>Bolder actions to deal with financial fragilities </li></ul></ul><ul><ul><li>More stable development financing aligned with reforms of financial system </li></ul></ul>Policy challenges
More coordinated stimulus, not less needed to move out of jobs crisis