UN Gloomy About Prospects Of Global Economy – Analysis

By R. Nastranis

Four years after the outbreak of the global financial crisis, the world economy is still struggling to recover but 2013 holds out good prospects for the economies of the least developed countries (LDCs), says the United Nations.

A new UN report titled ‘World Economic Situation and Prospects 2013’ expects GDP (Gross Domestic Product) growth to average 5.7 per cent in the New Year, up from 3.7 per cent in 2012. “However, most of the rebound is expected to come from improvements in economic conditions in Yemen and Sudan, following notable contractions of both economies in the face of political instability during 2010 and 2011,” says the report.

In per capita terms, the UN expects GDP growth for LDCs to accelerate from 1.3 per cent in 2012 to 3.3 per cent in 2013. While this signifies an improvement, says the report, at this rate welfare progress will remain well below the pace of 5 per cent per annum experienced during much of the 2000s, prior to the world economic and financial crisis.

Also, economic performance varies greatly among LDCs. The report says: “Numerous oil exporters such as Angola and Guinea will benefit from continued solid oil prices, propelling GDP growth to more than 7 per cent and 4 per cent, respectively, in 2013.”

But LDCs with a predominant agricultural sector have seen volatile economic conditions. In Gambia, for example, where agriculture provides about one third of total output, poor crop conditions caused GDP to contract by 1 per cent in 2012. According to the report, much better harvests would propel GDP growth to 6.2 per cent.

However, such sharp swings in the overall economic performance create multiple problems for policymakers. The inherent uncertainty not only complicates the planning and design of economic policies, especially those of a longer-term nature, but it also threatens the implementation of existing policy plans owing to sudden dramatic changes in economic parameters.

In addition, the UN report says, unforeseen crises create needs – in the form of short- term assistance to farmers, for example – which divert scarce financial and institutional resources away from more structurally oriented policy areas. On the other hand, adds the study, Ethiopia’s robust growth of the past few years is expected to come down slightly but remain strong, partly owing to its programme of developing the agricultural sector.

A number of LDCs have also seen solid investment and consumption, supported by sustained inflows of worker remittances. This applies, for example, to Bangladesh, whose growth rate will continue to exceed 6.0 per cent in 2013 and 2014 despite a marked slowdown in external demand. Growth of remittance inflows to Bangladesh picked up to about 20 per cent year on year in the second half of 2012, following a strong rise in overseas employment earlier in the year.

The outlook for LDCs entails several downside risks, warns the UN report. “A more pronounced deterioration in the global economic environment would negatively affect primary commodity exporters through falling terms of trade, while others may be affected by falling worker remittances. Falling aid flows are expected to limit external financing options for LDCs in the outlook.”

The report points out that during 2012, a growing number of developed economies have fallen into a double-dip recession. Those in severe sovereign debt distress moved even deeper into recession, caught in the downward spiralling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial sector fragility.

Spilling over

The economic woes of the developed countries are spilling over to developing countries and economies in transition through weaker demand for their exports and heightened volatility in capital flows and commodity prices, avers the report. “Their problems are also home-grown, however; growth in investment spending has slowed significantly, presaging a continued deceleration of future output growth if not counteracted by additional policy measures.”

Several of the major developing economies that have seen fast growth in recent decades are starting to face structural bottlenecks, including financing constraints faced by local governments regarding investment projects in some sectors of the economy, and overinvestment leading to excess production capacity in others, as in the case of China.

On average, the report spells out, 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 underpinning this continued growth trajectory include the strong performance of oil-exporting countries, continued fiscal spending in 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 considered insufficient to achieve substantial poverty reduction. Infrastructure shortfalls are among the major obstacles to more dynamic economic development in most economies of the region.

The UN report continues: The economies in developing Asia have weakened considerably during 2012 as the region’s growth engines, China and India, both shifted into lower gear. While a significant deceleration in exports has been a key factor for the slowdown, the effects of policy tightening in the previous two years also linger.

Domestic investment has softened markedly. Both China and India face a number of structural challenges hampering growth. India’s space for more policy stimulus seems limited. China and other countries in the region possess greater space for additional stimulus, but thus far have refrained from using it. In the outlook, growth for East Asia is forecast to pick up mildly to 6.2 per cent in 2013, from 5.8 per cent estimated for 2012. GDP growth in South Asia is expected to average 5.0 per cent in 2013, up from 4.4 per cent of 2012, but still well below potential.

The report finds contrasting trends in Western Asia. Most oil-exporting countries experienced robust growth supported by record-high oil revenues and government spending. By contrast, economic activity weakened in oil-importing countries, burdened by higher import bills, declining external demand and shrinking policy space.

As a result, oil-exporting and oil-importing economies are facing a dual track growth outlook. Meanwhile, 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. In the outlook, subject to the risks of a further downturn, the baseline projection is for a return to moderate economic growth rates, led by stronger economic performance in Brazil. For the region as whole, GDP growth is forecast to average 3.9 per cent in the baseline for 2013, compared to 3.1 per cent in 2012.

Among economies in transition, growth in the economies of the Commonwealth of Independent States (CIS) has continued in 2012, although it moderated in the second half of the year. Firm commodity prices, especially those of oil and natural gas, held up growth among energy-exporting economies, including Kazakhstan and the Russian Federation. In contrast, growth in the Republic of Moldova and Ukraine was adversely affected by the economic crisis in the euro area.

The economies of small energy-importing countries in the CIS were supported by private remittances. In the outlook, GDP for the CIS is expected to grow by 3.8 per cent in 2013, the same as in 2012. The prospects for most transition economies in South-Eastern Europe in the short run remain challenging, owing to their close ties with the euro area through trade and finance. In these economies, GDP growth is expected to average 1.2 per cent in 2013, a mild rebound from the recession of 2012 when economies in the subregion shrank by 0.6 per cent.