UN Warns Increased Risk Of Recession

A UN report on Thursday warned that risks for another recession next year in the developed world has heightened, and that its impact will inevitably affect the developing countries.

The report entitled “World Economic Situation and Prospects 2012”, issued by the UN Department for Economic and Social Affairs (DESA), 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.

It cautioned, however, that this forecast is conditioned on containment of the euro-zone debt crisis and a halt to further moves toward stringent fiscal austerity in the developed countries.

“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,” the report warned.

It noted that slower growth in developed countries is also affecting developing countries.

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, down from the pace of 7.1 per cent achieved in 2010.

It noted that even as economic ties among developing countries strengthen, they remain vulnerable to economic conditions in the developed economies.

It also noted 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.

It further indicated that 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.

The report called on developed country governments not to embark prematurely on fiscal austerity policies given the still fragile state of the recovery and prevailing high levels of unemployment.

Japan, the report noted, was in another recession in the first half of 2011, caused largely, but not exclusively, by the disasters of the March earthquake. While post-quake reconstruction is expected to lift GDP growth in the country to above potential at about 2 per cent in the coming two years, risks remain on the downside.

The report indicated, however, that among the major developing countries growth in China and India is expected to remain robust, even though the GDP growth in China slowed from 10.3 per cent in 2010 to 9.3 per cent in 2011 and is projected to further slow to below 9 per cent in 2012-2013, and India’s economy is expected to expand by between 7.7 and 7.9 per cent in 2012- 2013, down from 8.5 per cent in 2010.