Risks for another global downturn have heightened

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 world gross product (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.

UN economists project that 2012 will be a make-or-break year in terms of proceeding with slow economic recovery or falling back into recession.

“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,” says WESP 2012 pre-launched today by Jomo Kwame Sundaram, Assistant-Secretary-General for Economic and Social Affairs (DESA), and Rob Vos, Director of DESA’s Development Policy and Analysis Division.

“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.”

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. 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, 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 and, 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.

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