USA and Europe Pushing World into Trouble

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Credit: UNBy J. C. Suresh
IDN-InDepth NewsReport

TORONTO (IDN) - The United Nations has painted a rather bleak picture of the global economy in 2012, which it says will be a make-or-break year in terms of proceeding with slow economic recovery or falling back into recession because of the failure of policymakers in Europe and the United States.

"A serious, renewed global downturn is looming because of persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009," the UN Department of Social and Economic Affairs (DESA) warns in a new report. "A recession in either Europe or the United States alone may not be enough to induce a global recession, but a collapse of both economies most likely would," it adds.

While developed economies are on the brink of a downward spiral and renewed global recession is in fact just around the corner, developing countries and economies in transition are expected to continue to stoke the engine of the world economy. "But they would likely take a significant blow," says the World Economic Situation and Prospects (WESP) 2012: Global economic outlook.

The impact would, however, vary as the economic and financial linkages of developing countries and economies in transition to major developed economies differ. WESP 2012 prognosticates that Asian developing countries, particularly those in East Asia, would suffer mainly through a drop in their exports to major developed economies. Those in Africa, Latin America and Western Asia, along with the major economies in transition, would be affected 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 affect both official reserve holdings and private sector assets," the study warns.

As a result, the report adds, GDP (gross domestic product) growth in developing countries would decelerate from 6 per cent in 2011 to 3.8 per cent in 2012, amounting 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-term growth trend.

This growth slowdown is not quite as big as in 2009 (when the pace of developing country growth dropped by almost 4.5 percentage points). Yet various regions would suffer negative per capita income growth, which would in turn cause renewed setbacks in poverty reduction and in achieving the other Millennium Development Goals (MDGs).

The study expects growth of world gross product (WGP) to decelerate to 0.5 per cent in 2012, implying a downturn in average per capita income for the world – a reason for Jomo Kwame Sundaram, UN assistant secretary-general for economic development with the DESA, telling journalists at the UN headquarters in New York: "The situation in the world is rather grim." He added: "We have a situation where we may well be at risk of a double dip. In any case, it is very likely that there will be further slowdown."

Sundaram, along with Rob Vos, director of development policy and analysis for DESA, briefed journalists on the report and its implications at the UN headquarters on December 1, 2011. The WESP report, released annually, outlines three possible projected scenarios for the global economy: a baseline projection, as well as optimistic and pessimistic projections.

Failure of Policymakers

Sundaram said the world economy following the pessimistic route is "increasingly likely" for several reasons. "Most importantly from the United Nations perspective, we have a situation where through collective action as well as inaction, the situation is likely to deteriorate further," he said.

"Failure of policymakers, especially those in Europe and the United States, to address the jobs 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," according to WESP 2012 pre-launched.

"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 deficiencies.

"All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn," says the report.

Persistent high unemployment, the euro area debt crisis and premature fiscal austerity have already slowed global growth and factor into the possibility of a new recession, warns the World Economic Situation and Prospects (WESP) 2012: Global economic outlook, which was pre-released today at UN Headquarters in New York.

The UN has significantly downgraded its forecast from six months ago and predicts now that, at best, the global economy will "muddle through" with the growth of WGP reaching 2.6 per cent in the baseline outlook for 2012 and 3.2 per cent for 2013, down from 4.0 per cent in 2010. This forecast is conditioned, however, on containment of the euro zone debt crisis and a halt to further moves toward stringent fiscal austerity in the developed countries.

Impact on Developing Countries

Developing countries and economies in transition are expected to continue to stoke the engine of the world economy, growing on average by 5.4 per cent in 2012 and 5.8 per cent in 2013 in the baseline outlook. But this is well below the pace of 7.1 per cent achieved in 2010, when output growth among the larger emerging economies in Asia and Latin America, such as Brazil, China and India, had been particularly robust.

And even as economic ties among developing countries strengthen within the framework of South-South cooperation, says the report, they remain "vulnerable to economic conditions in the developed economies". From the second quarter of 2011, economic growth in most developing countries and economies in transition started to slow notably.

WESP says that persistent high unemployment in the United States at a rate of more than 9 per cent and low wage growth are further holding back aggregate demand. Together with the prospect of prolonged depressed housing prices, this has heightened risks of a new wave of home foreclosures, especially in the United States.

Growth in the euro zone has slowed considerably since the beginning of 2011 and the collapse in confidence displayed 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 into early 2012.

"Even with an optimistic assumption that the debt crisis can be contained within a few countries, growth is expected to be only marginally positive in the euro area for 2012, with the largest regional economies like Germany and France dangerously close to a renewed downturn and the debt-ridden economies in the periphery either in protracted recession or very close," says the report. [IDN-InDepthNews – December 3, 2011]

Picture: Jomo Kwame Sundaram, UN assistant secretary-general for economic development Credit: UN

2011 IDN-InDepthNews | Analysis That Matters

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