Global economic outlook is marked by risks and uncertainties

World economic recovery will be uneven in the coming years. Prospects for advanced economies are marred by persistent high unemployment, withdrawal of stimulus measures, and continued financial fragility. Sovereign debt distress and tensions over exchange rates risk affecting global stability, which could also affect the till now much more robust performance of most developing countries.

According to the UN report the “World Economic Situation and Prospects (WESP) 2011”, to be released worldwide on 18 January, the expected economic expansion will be 3.1 per cent in 2011 and 3.5 per cent in 2012, which is far from optimal to enable economic revitalization.

The economy of the United States is expected to grow by 2.2 per cent in 2011; a slowdown from the 2.6 per cent growth in 2010. Economic recovery in the Euro area is forecasted to come to a virtual halt, with output expanding at a mere 1.3 per cent in 2011 and 1.9 per cent in 2012. In a more pessimistic scenario, the UN report predicts that Europe could well see a double-dip recessionn, while the economies of the United States and Japan might virtually stagnate and possibly also fall back into recession during 2011.

The global economy is being held up by robust recovery in developing countries since the third quarter of 2009. But the weakening economic landscape of developed nations is expected to moderate growth in developing countries from 7.0 per cent in 2010 to 6.0 per cent on average during 2011-2012.

Risks and Uncertainties

Rob Vos, Director of the Development Policy and Analysis Division of DESA emphasized that “We are not out of the woods yet and greater risks are looming.”

Factors affecting the economic recovery include the diminished cooperative spirit among major economies, reflected in uncoordinated monetary responses leading to turbulence and uncertainty in financial markets. At the same time, fiscal stimulus is being withdrawn in many economies, which in the present context threatens to keep unemployment high and drag the recovery in the near outlook.

Between 2007 and 2009 at least 30 million jobs were lost, and this number could even be greater, as it does not consider increases in precarious employment in the informal sector and rates of underemployment. Unemployment rates in most developed economies, except a few such as Germany and Australia, have stayed high and hardly come down.

In the Unites States, for instance, the unemployment rate may increase to 10 per cent at the beginning of 2011, up from 9.6 percent in the third quarter of 2010. Some European countries are facing even more daunting prospects, such as in Spain where the rate jumped to 20.5 per cent in 2010 and where more than 40 per cent of the youth are without a job. The report predicts that unemployment rate will come down in the Euro zone at a snail’s pace. With many without a job, household consumption will remain sluggish and drag output growth down. Vice versa, weak output growth will limit the creation of jobs.

Besides the lack of job creation, volatility in currency markets resulting from uncoordinated monetary expansions has increased tensions over currencies. This is adding more uncertainty to the already unstable macroeconomic landscape. The report explains that the strong quantitative easing (in simple terms, printing more dollars) in the United States, is putting downward pressure on the value of the world’s reserve currency, causing ripples in currency markets worldwide. The UN warns that heightened tensions over currency and trade could potentially trigger renewed turmoil in financial markets.

Key challenges ahead

Providing more fiscal stimulus in the short run is the first of five key challenges that needs to be addressed according to the report. It provides evidence that most developed countries still have ample fiscal space and hence could provide such stimulus to regain the momentum of the recovery. Such action should be adequately coordinated among the major economies to ensure a reinvigoration of global growth that will also provide external demand for those economies which have exhausted their fiscal space. Absent of a new net fiscal stimulus and a faster recovery of bank lending to the private sector, growth is likely to remain anaemic in many countries in the foreseeable future.

The report sees a redesign of the fiscal stimulus as the second challenge. Thus far, stimulus packages in developed countries have focused mostly on income support measures, with tax-related measures accounting for more than half of the stimulus package. Expanding public investing on renewable clean energy is a measure that the report cites as an adequate vehicle to aid economic recovery as this type of stimulus provides significantly greater employment effects. Monitoring closely the way in which income growth and productivity gains are shared in society, providing job-search training, and enhancing social protection policies are some of the other ways in which nations can redesign their fiscal spending.

As indicated, uncoordinated monetary expansion has been a cause of damaging exchange rate instability. The third challenge, therefore, is to avoid damaging international spillover effects, reaching cross-border agreements about the magnitude, speed and timing of quantitative easing policies will reduce the likelihood of increased global imbalances.

The fourth challenge is to ensure that there is sufficient financing for achieving the MDG’s and also to increase investments for sustainable development in low-income countries. The report highlights that these countries have reduced fiscal space while facing large development deficits. Apart from delivering on existing aid commitments, donor countries should consider mechanisms to delink aid flows from their business cycles so as to prevent delivery shortfalls in times of crisis, when the need for development aid is most urgent.

Governments in major economies have become more focused on domestic policy challenges than on the spillover effects of their actions. Consequently, the fifth challenge will be to find effective ways to strengthen international policy coordination. According to the report, the focus in recent policy debates on exchange-rate realignment is too narrow and bilaterally focused.

In this regard, there is some urgency in making the G20 framework for sustainable global rebalancing more specific and operational. The report suggests that establishing concrete “current-account target zones” might be a meaningful way forward. Having clear and verifiable targets for desired policy outcomes would help make parties accountable, while the possible loss of reputation through non-compliance would be an incentive to live up to policy agreements.

Such target zones would also highlight the need for both surplus and deficit countries to contribute to sustaining global effective demand. The target zones should not, however, be seen as an end in themselves, but rather as a guide towards a sustainable growth path for the world, which should encompass the proposed actions to address all five key challenges.

As stated by Mr. Vos, “The road to recovery will be long and bumpy.” However, if a cooperative spirit among developed economies is revived, economic responses are coordinated, and fiscal stimulus is resigned, a more optimistic scenario for the world economy could become within range.

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