“The economic woes in Europe, Japan and the US are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices. Most low-income countries have held up relatively well so far, but are now also facing intensified adverse spillover effects from the slowdown in both developed and major middle-income countries,” Pingfan Hong, Chief of the Global Economic Monitoring Unit of DESA’s Development Policy and Analysis Division, at the World Economic Outlook for 2013, said.
Hong pointed to the deterioration of the euro crisis, the US fiscal cliff and a possible hard landing for some large developing countries.
“To mitigate these risks, policymakers worldwide are greatly challenged,” Hong said, also describing how the world economy is still struggling to recover five years after the eruption of the global financial crisis.
The first chapter of the World Economic Situation and Prospects 2013 (WESP) just launched outlines that growth of the world economy has weakened considerably during 2012 and is expected to remain restrained in the coming two years. “A number of developed economies in Europe and Japan have already fallen into a double-dip recession,” Hong, said.
The report also predicts that global economy is expected to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014, a significant downgrade from the forecast six months ago. This growth pace will not be enough to overcome the continued jobs crisis faced by many countries. With existing policies and growth trends, it may take at least another five years for Europe and the United States to make up for the job losses caused by the Great Recession of 2008-2009.
Weaknesses in the major developed economies are at the root of the global economic slowdown. It is stressed that most of them, particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth. Several European economies and the euro zone as a whole are already in recession, and unemployment here increased further to a record high of almost 12 per cent this year.
“The US economy remains sluggish,” Hong pointed out, referring to the trend seen in 2012 and with a predicted growth for 2013 of 1.7 per cent. Mr. Hong continued saying that “several large developing economies such as Brazil, China and India, which managed to recover rapidly in the aftermath of the global financial crisis, are currently also facing a significant slowdown”.
The prospects for the next two years continue to be challenging, fraught with major uncertainties and risks slanted towards the downside. “Each of these risks could cause global output losses of between 1 and 3 per cent,” Rob Vos, the Director of DESA’s Development Policy and Analysis Division and the team leader for the report, said.
The report further assesses that present policy stances fall short of what is needed to spur economic recovery and address the jobs crisis. While policy efforts have tried to redress sovereign debt distress, the combination of fiscal austerity and expansionary monetary policies has had mixed success so far in calming financial markets and even less so in strengthening economic growth and job creation.
Fiscal policies need to shift focus from short-term consolidation to robust economic growth with medium to long-term fiscal sustainability. They should also be internationally coordinated and aligned with structural policies, supporting direct job creation and green growth. The report also recommends that monetary policies be better coordinated internationally. It also underlines the need to secure sufficient development assistance to help the poorest nations accelerate progress towards poverty reduction goals and invest in sustainable development.
Several European economies are already in recession. To address the situation, a number of new policy initiatives have been taken by the euro area authorities in 2012, including the Outright Monetary Transactions (OMT) programme. But there has been no significant initiative towards boosting growth in the short run or tackling the ever-mounting crisis in the labour markets.
The euro area economy is expected to grow by only 0.3 per cent in 2013 and 1.4 per cent in 2014 and because of the dynamics of the vicious circle, the risk for a much worse scenario remains high and could be triggered by deeper fiscal cuts and delayed implementation of the OMT programme.
The unemployment rate continued to climb to a record high during 2012. In Spain and Greece, more than a quarter of the working population is without a job and more than half of the youth is unemployed. Only a few economies in the region, such as Austria, Germany, Luxembourg and the Netherlands, register low unemployment rates of about 5 per cent. Unemployment rates in Central and Eastern Europe also edged up slightly in 2012.
The US economy also weakened during 2012, and growth prospects for 2013 and 2014 remain slow-moving. On the up side, the housing sector is showing signs of recovery, and further support is expected from the new round of quantitative easing recently launched by the Federal Reserve (Fed). The unemployment rate stayed above 8 per cent for the most part of 2012, but dropped to just below that level from September onwards.
The lingering uncertainties about the fiscal stance continue to hold back business investment and external demand is also expected to remain weak. Growth of GDP (gross domestic product) in the US is forecast to decelerate to 1.7 per cent in 2013 from 2.1 per cent in 2012. Risks remain high for a bleaker scenario, emanating from the “fiscal cliff,” which would entail a drop in aggregate demand by as much as 4 per cent of GDP during 2013 and 2014, as well as from spillover effects.
Economic growth in Japan in 2012 was up from a year ago, mainly driven by the reconstruction work following the earthquake-related disasters of 2011. And for 2013 and 2014, Japan’s GDP is forecast to grow at 0.6 per cent and 0.8 per cent, respectively. The Japanese government took additional measures to stimulate private consumption; however exports faced strong headwinds from the slowdown in global demand and appreciation of the yen. Japan’s economy is also expected to slow as a result of the phasing out of incentives to private consumption and a new measure that increases the tax on consumption, reduces pension benefits and cuts government spending.
Economies in developing Asia have also weakened during 2012, as the region’s growth engines, China and India, have shifted into lower gear. Deceleration in exports has been a key factor behind the slowdown; however, both economies also face a number of structural challenges, hampering growth. Average growth in East Asia is forecast to pick up to 6.2 per cent in 2013 and GDP growth in South Asia is expected to average 5.0 per cent in 2013, up from 4.4 per cent in 2012.
Economies in Africa are forecast to see a slight moderation in output growth in 2013 to 4.8 per cent, down from 5.0 per cent in 2012. Major factors behind this continued growth route include the strong performance of oil-exporting countries, continued fiscal spending on infrastructure projects, and expanding economic ties with Asian economies. However, Africa remains plagued by numerous challenges, including armed conflicts in various parts of the region. Growth of income per capita will continue, but at a pace insufficient to accelerate poverty reduction.
Contrasting trends are found in Western Asia, where most oil-exporting countries have experienced robust growth supported by record-high oil revenues and government spending. Social unrest and political instability, notably in the Syrian Arab Republic, continue to elevate the risk assessment for the entire region. On average, GDP growth in the region is expected to decelerate to 3.3 per cent in 2012 and 2013, from 6.7 per cent in 2011.
GDP growth in Latin America and the Caribbean decelerated notably during 2012, led by weaker export demand and lower prices of non-food commodities in the region’s exports.
In the outlook, subject to the risks of a further downturn, the projection is for a return to moderate economic growth rates, led by expected improvements in economic conditions in Brazil. For the region as whole, GDP growth is forecast to average 3.9 per cent in the baseline for 2013, compared with 3.2 per cent in 2012.
Economic growth in the Russian Federation and other countries of the Commonwealth of Independent States (CIS) was robust in 2012, although it moderated in the second half of the year.
Firm commodity prices, especially the prices of oil and natural gas, held up growth among energy-exporting economies, including the Russian Federation and Kazakhstan. In the outlook, GDP for the CIS is expected to grow by 3.8 per cent in 2013, the same as in 2012.
More findings on the world economy will be revealed on 18 January 2013 when the full report of the World Economic Situation and Prospects 2013 will be launched. The report is produced by DESA, the United Nations Conference for Trade and Development (UNCTAD) and the five United Nations regional commissions.
Describing the way forward, tackling the grim economic situation, Hong said, “some countries have indeed strengthened their policy stance, but we need more concerted policy actions, at both national and international levels. We also need policies to focus more on promoting jobs creation.”