Is Global Recovery Losing Steam?
Renee Horne-London 19th January 2011
According to a UN report released this week, it may about to become a lot harder for us to get our businesses growing again.
The World Economic Situation and Prospects Report (WESP) was launched in Johannesburg, South Africa. The 202 page report is a UN flagship publication and takes a snapshot of the world economy, indicating that the ‘sovereign debt problems of some EU members will start to agitate financial markets again, thereby aggravating the difficulties facing the banking sector and depressing confidence’. The report highlights the growing concern that the global recovery is losing pace due to coordinated policy stances which may be inadequate for reinvigorating growth and could be a source of renewed instability. This pessimistic scenario was simulated using the UN World Economic Forecasting Model (WEFM), which quantifies the possible implications for global growth.
In an interview with the World Entrepreneur Society (WES), Assistant Secretary-General for Economic Development in the UN department of Economic and Social affairs, Professor Jomo Kwame Sundaram argued that ‘one has seen recovery in 2010 but this economic growth cannot be sustained, which is a major concern”.
Upside in some countries?
According to the report, all indicators point at weaker global economic growth. The UN expects that the world economy will expand by 3.1% in 2011 and 3.5% in 2012. But this may not be enough to turn around the crisis of unemployment, business investment and the housing sector.
The recovery may suffer further setbacks if some of the downside risks materialise, in which case a double-dip recession is looming for Europe, Japan and the US. While the US has been on the path to financial recovery at 2.6 % growth in 2010, growth is expected to moderate further to 2.2 % in 2011 before improving slightly to 2.8 % in 2012. According to the report, this pace will not make much of a dent in unemployment rates, and recovering the jobs lost during the crisis would take at least another four years.
There are even dimmer prospects for Europe and Japan. GDP growth in the Euro area is forecast to virtually stagnate at 1.3 % in 2011 and 1.7 % in 2012 as growth in 2010 was 1.6%. Some countries such as that of Greece, Ireland, Portugal and Spain, are entrapped in sovereign debt distress, so their economies are likely to remain in recession or stagnate. Japan’s kick-start to 2010 was strong due its net export growth but faltered during 2010, with projected growth a mere 1.1 % in 2011 and 1.4% in 2012.
Despite the pessimistic outlook for developed countries, Prof Sundaram argues that the outlook is positive, that the strongest recovery is from Asia and Africa. Developing Asia, led by China and India, continues to show the strongest growth performance, although he expects growth to slow slightly (to around 7 per cent) in 2011 and 2012. Africa’s economic recovery has been solid, the report shows the rebound is expected to push through at about 5 per cent per year in 2011 and 2012, but this is well below potential and conditions vary across the region.
Growth in Latin America is likely to remain relatively strong, with Brazil being the engine of regional growth. The Middle East and other countries in Western Asia are expected to moderate from 5.5 per cent in 2010 to 4.7 per cent in 2011 and 4.4 per cent in 2012. At this pace, the average annual output growth will be lower than the pre-crisis rate. Hence in some cases this reduces the inequalities between some developed and developing nations, which is very positive.
Overall the report indicates that developing countries continue to drive the global recovery, but their output growth is also expected to moderate to 6% during 2011-2012, down from 7% in 2010, because of the slowdown in the advanced countries and phasing out of stimulus measures.
Short and Long Term Solutions
Uncoordinated monetary responses, in particular, have become a source of turbulence and uncertainty in financial markets. WESP indicates that the short term solution is more fiscal stimulus to reinvigorate the recovery; however improved coordination with monetary policies is needed to facilitate a sustainable rebalancing of the global economy. And this means improved international policy coordination.
Prof Sundaram argues that the slow growth is due to the break down in international cooperation, “We saw international cooperation in 2009, but now government and authorities are moving in different directions, hence sustainable growth cannot be achieved”. He argues that the long term solution is through existing international organisations such as the IMF and the UN, also a reduced group of cooperation, “the G20 did a fairly good job in 2009, but is it sustainable?” The long and short of this message is that governments in their respective countries should not act alone, as an injury to one is potentially an injury to all.
The Weakest Link
If you desperately searching for a job, it may take longer, due to the slow global recovery, twenty-two million new jobs will need to be created and this could take up to five years to achieve. It’s likely that few new jobs will be created due to governments fiscal tightening which includes tax hikes and spending cuts. Prof Sundaram warns that those “who are also employed are at risk” as economic growth is in troubled waters, he adds that the growing concern is the “the increased social problems caused by the many unemployed young people”. Young people aged 15-24 are the hardest hit, with 81 million young people unemployed around the world in 2009; the report indicates virtually no improvement in the near future.
Unemployment is the real threat to recovery. Between 2007 and by the end of 2009, at least 30 million jobs were lost worldwide as a result of the global financial crisis. Perhaps, some good news for those looking for jobs in the developed economies of Australia and Germany as these countries has seen an improvement in their labour markets. The US picture is different showing only a slight improvement. In Japan, the improvement in the labour market was marginal during 2010, with the unemployment rate expecting to remain above 5% in 2011. The projected global outlook is that the unemployment rate may increase to 10 per cent in early 2011, up from 9.6 % in the third quarter of 2010.
Major Sectors Affected…..
Private consumption, business investment, the housing sector and import demand in major developed economies would all be significantly weaker. For example, in the US, consumption growth would decelerate from 1.6% in 2010 to 0.5% in 2011 and 2012. Growth in business investment would slow to 1.8% in 2011, down from 6.4%. The housing sector, as measured by residential investment, would continue to contract by another 5 %. A slowdown is expected in private consumption and business investment in the EU, where GDP would fall by 0.4 % in 2011, followed by a feeble recovery of 1.4% in 2012.
The Domino Effect
Those developing countries that are economies in transition will be hurt by a further slowdown in developed countries. The report’s analysis refers specifically to trade. The dependence and demand of these economies from the major developed economies remains high, as more than half of their exports are still destined for developed economies. Some Asian and Latin American economies would be hit harder because of greater trade dependence on demand growth in major developed economies.
So 2011/2012 may not be the years of recovery we expect, according to Professor Sundaram: “Spending is important it raises demand, but don’t live above your means”. One has to now ponder that perhaps the quickest road to recovery is the good old fashioned way, ‘It’s time to save ...It’s time to tighten our belts’.
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