Vicious cycle of debt, low growth and high unemployment dominate global economic woes
23 October 2012, New York
In a meeting of the Second Committee and the ECOSOC on the Global Economic Outlook, Rob Vos, Director of DESA’s Development Policy Analysis Division, said that without a “fundamental policy shift”, the renewed global economic slowdown would considerably raise the risk of a downward spiral into another global recession, as the US approached a “fiscal cliff” due to domestic political deadlock, the eurozone crisis escalated and major emerging economies faced the prospect of a “hard landing”.
Co-chairing the event that took place on 22 October, were Second Committee Chair George Talbot (Guyana), and ECOSOC Vice President Luis-Alfonso De Alba (Mexico). The panel featured Peter Pauly, Professor of Economics and Business Economics, University of Hamburg; Andrew Burns, World Bank; Moazam Mahmood, International Labour Organization (ILO); and Shamshad Akhtar, Assistant Secretary-General for Economic Development, Department of Economic and Social Affairs.
“The global economy is still in a very precarious situation and the outlook is most sobering”, said Mr. Vos, as he outlined three key messages on the current global economic situation. According to Vos, the weaknesses in the major developed countries continue to be at the root of these global economic woes.
Most of these countries, particularly in Europe, are dragged in the downward spiral that has heightened sovereign risks, continued banking fragility, fiscal tightening, slower growth and rising unemployment. “And these elements are viciously feeding back into each other,” Mr. Vos stated. He also explained that most of the risks and uncertainties are slanted to the downside. “The immediate risks are the further deepening of the euro crisis and the continued budget policy impasse in the United States that could lead to further downward adjustments affecting the global economy.”
Developed and emerging economies could also face the risk of a hard landing of their economies after having grown very fast in the last decade. Finally, Mr. Vos suggested that although there have been major efforts to break out of this vicious cycle, particularly with an emphasis on monetary expansion and structural reforms, “the effects have been muted at best”. In addition, “home-grown” problems, particularly the phasing out of stimulus measures and policy tightening in some countries, were causing the sort of significant growth decelerations seen recently in Brazil, China and India.
Rob Vos then presented the findings of The Global Economic Outlook report, which proposes a different and more comprehensive policy approach, moving away from the current emphasis on fiscal austerity to more focus on short and long-term measures to stimulate jobs growth, including by investing in green growth, accelerate financial sector reforms, and better coordination of fiscal and monetary policies at the national and international levels.
Focusing on tackling one of those home-grown challenges, Mr. Andrew Burns of the World Bank said that “output gaps” in developing countries were markedly different to those seen in the developed world. The recession had caused a clear and significant gap between the potential output of the latter and their actual output, which remained, he said.
Developing countries, however, had recovered fairly quickly from recession, with figures showing that many remained within 1 per cent of their potential output. Therefore, he called for policy choices focused on structural improvements that would yield longer-term growth and stability rather than on stimulating output in economies that were actually quite healthy in that regard.
Good fiscal situations had actually protected many developing countries when the crisis had hit, and many had emerged well, he continued. However, doing so had impacted their fiscal surpluses, and they now generally found themselves in much less healthy fiscal situations. It was important to use the current period of relative economic calm to re-establish the fiscal cushions needed to prevent a “very bad situation” arising if the global economy “double-dipped”, he stressed.
That cushioning was particularly important, given the comments of Prof. Peter Pauly, who said the current recovery was very different to a normal business cycle, with growth far below its potential path. Poor growth was something the world would “have to live with” for a number of years, with few short-term solutions immediately apparent. Indeed, for many countries, especially in Europe, fiscal expansion was not an option due to debt and austerity measures that were costing far too much, he said.
The current fundamentally slow growth period would persist “for quite some time”, he predicted, saying the return of global growth and stability would depend on the recovery of financial stability in Europe. That in turn would require deeper integration, though that was a longer term project which would not produce immediate results. In the medium term, Prof. Pauly said, despite some significant medium-term opportunities, he did not envisage growth breaking through 2 per cent.
Mr. Mahmood of the ILO said he saw evidence of a global economic recovery, but it had not been accompanied by similar growth in jobs and employment opportunities. That was particularly significant in the advanced economies, he said, adding that the structural reforms being undertaken in Europe were “off the mark”. He predicted the loss of a further 2.5 million jobs in 2013, mainly in the European Union but with spillover effects elsewhere, and said the world must create 30 million jobs to begin redressing the increase in unemployment recorded since the beginning of the global economic crisis in 2007.
Source: UN Department of Public Information