This year was characterized by a fragile recovery in the economy. In fact, in mid-2010, the economic growth started to decelerate, and all indicators point at a weaker economic growth for the upcoming year. The expected economic expansion of 3.1 per cent in 2011 and 3.5 per cent in 2012 will not be sufficient to enable recovering the jobs lost because of the crisis.
“The road to recovery is long and bumpy,” emphasized Robert Vos, Director of the Development Policy and Analysis Division, DESA, during the pre-launch of the UN flagship report “World Economic Situation and Prospects 2011 (WESP).”
The cooperative spirit among major economies is waning, uncoordinated economic responses have become a source of turbulence and uncertainty in the financial markets, and the presence of downside risks are all factors contributing to slow growth of the economy for the next year.
Generally speaking, the growth prospects across the globe are far less than optimal. According to the report, the United States growth is expected to be 2.2 per cent in 2011, 0.4 per cent less than in 2010. GDP Growth in the Euro area is forecasted to virtually stagnate at 1.3 per cent in 2011 and 1.9 per cent in 2012. Even though developing countries will continue to drive the global economic recovery, their output growth will decrease from 7.0 per cent in 2010 to 6.0 per cent during 2011-2012.
In a more pessimistic scenario of greater uncertainty and no change in policies, the UN report predicts that Europe could well see a double-dip recession, while the economies of the United States and Japan might virtually stagnate and possibly also fall back into recession during 2011. This would also significantly lower growth prospects for developing countries (by almost 1 percentage point).
According to Mr. Vos, persistent high unemployment and weaker stimulus, continued financial fragility, sovereign debt and risk of “currency wars”, are some of the most pressing risks and uncertainties that could hindering economic recovery. He added that surging capital inflows, currency appreciation and risk of asset bubbles could also have a negative impact on the world’s economy in the upcoming year.
Five Policy Challenges
According to the report, in order to achieve sustained economic recovery, there is the need to overcome five major policy challenges. First, more and better coordinated fiscal stimulus must be in place. This means to also increase coordination among surplus and deficit, and between those with ample and limited fiscal space.
Secondly, it’s imperative that the fiscal stimulus is redesigned. Nations should place more focus on direct spending, such as infrastructure, which creates more jobs and promotes sustainable development.
The third challenge is to find greater synergy between fiscal and monetary stimulus while increasing coordination with other existing policies. It was highlighted that monetary expansion should be done in tandem with fiscal stimulus.
The fourth challenge is to ensure that sufficient and stable development finance is made available for developing countries with limited fiscal space and large developmental deficits, including resources for achieving the MDGs and investing in sustainable and resilient growth.
The final challenge is to strengthen the framework for international policy coordination. “Cooperative spirit is waning when it’s needed more,” Mr. Vos said. It is urgent in this regard to make the G20 framework for sustainable global rebalancing more specific and concrete. Finally, the framework should compromise addressing all five challenges.
The full report, including regional overviews and a detailed analysis of trends in global trade and finance will be available from the second full week of January 2011.