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• Concerns over sovereign debt sustainability in Europe and the United States cast clouds over global economic recovery
• Oil and other primary commodity prices remain high, keeping up headline inflation and affecting output growth in major economies
• Growth is beginning to moderate in some regions which had experienced robust performance in 2010 on the back of internal efforts to contain inflationary pressures and a receding global demand

The prospects for continued global economic recovery are at risk. Concerns have increased that efforts to deal with sovereign debt problems in the United States and peripheral countries of Europe may falter. Possible defaults could inflict on global demand and financial stability.

 

The amount of outstanding federal Government debt of the United States will reach the legal boundary of $14.3 trillion in early August, according to official estimates. Even if the debt burden against private and foreign holders (after netting out transactions with the Federal Reserve) would seem manageable, congressional agreement is required to raise the ceiling on the total debt. Without an accord, the Government would enter into a serious impasse. Given the present political gridlock, a likely way out would be an agreement on significant spending cuts that would become effective soon. A rapid switch to fiscal austerity would likely slow the pace of recovery of the United States economy which has already lost momentum and has been too weak to push back unemployment. Further weakening of the world’s largest economy would have global repercussions.