Europe Is Sick, the Whole World to Suffer

Human Wrongs Watch

“Countries throughout the world will experience an economic slowdown this year as the sovereign debt crisis in Europe continues to unfold,” says a UN report. 

*European Central Bank – Image: ArcCan | Wikimedia Commons

The World Economic Situation and Prospects 2012 (WESP) report gives a detailed picture on seven geographical regions and forecasts that growth rates for the next two years will slow down in most of them.

The risks of further worsening of the situation in Europe and the United States have increased.”

The report, released by the UN Department of Economic and Social Affairs (DESA), points to the European sovereign debt crisis that erupted in Greece last May as “a major shock to the global economy,” whose multiple negative effects will continue to reverberate around the world.

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 states.

Africa Will Continue to Grow!

The report estimates that growth in the European Union (EU) is expected to be only 0.7 per cent in 2012, substantially lower than the 1.6 per cent growth registered last year. In addition, unemployment throughout the continent will remain near 10 per cent in the euro area, having changed very little since September 2009.

Africa is expected to continue to grow, defying the global trend, says the report, which was released  on 17 Jan. “The continent is forecast to see an increase in its overall growth from 2.7 per cent in 2011 to 5 per cent in 2012 and 5.1 per cent in 2013. This growth will mainly be driven by relatively strong commodity prices, solid external capital inflows and continued demand and investment from Asia.”

However, growth will vary greatly among countries in the continent due to military conflicts, corruption, lack of infrastructure and severe drought in certain areas. The report also warns that unemployment and poverty remain major problems and sources of instability, which have already led to political unrest in North Africa.

South Africa is expected to have the strongest economic growth in 2012, supported by growing demand from Asia, continued fiscal stimulus measures and an increase in consumption driven by rising wages.

The Arab Region, Subject to High Uncertainty

The economic picture in the Arab World will continue to be subject of high uncertainty due to the political transition and civil protests brought by the Arab Spring.

Regional growth is forecast to decline from 6.6 per cent to 3.7 per cent as violent clashes hampered economic activity in several Arab countries. Social unrest also affected trade and tourism revenues, particularly in Lebanon.

However, the report states that generous social spending measures implemented in 2011 by Arab governments such as Saudi Arabia as a way to alleviate popular protests helped boost economic growth and the impact of these measures will continue to be felt throughout 2012.

As with Europe and Africa, the WESP says that unemployment remains a key problem in the region. Despite extremely low female participation rates, unemployment rates in the region are among the highest in the world, especially among the educated youth, and the report warns that leaving unemployment unaddressed represents a major risk to stability in the region.

East Asia, Projected to Decline

In East Asia growth is projected to decline to 6.9 per cent in both 2012 and 2013. China, the biggest economy in the region, is also expected to slow down from 9.3 per cent to 8.7 per cent growth in 2012. A major deceleration from China, however, would represent a more pronounced slowdown for the rest of the region, it adds.

Latin America Remains Susceptible

The South Asian and Latin American and Caribbean regions remain particularly susceptible to the future of developed economies as both the EU and the US are key export markets as well as sources of tourism revenue.

For Latin America, a slowdown in China would also adversely affect the region as it is a major buyer of its commodities and a key investor in South America, according to the UN report, 

Clouds over the region are darkening. The risks of further worsening of the situation in Europe and the United States have increased,” UN economist Rob Vos said in his presentation of the report in Mexico City.

Latin American and Caribbean economies would be hard hit and growth could drop below 1 per cent in the region, with Brazil stagnating and Mexico falling into recession along with the United States economy.”

Last month, DESA had warned that premature fiscal austerity measures by developed countries risked prompting a new global recession, and recommended additional stimulus measures to stimulate job creation and investment.

World Economy on the Brink of Another Major Downturn

The new report states that the world economy is on the brink of another major downturn. Global economic growth started to decelerate on a broad front in mid-2011 and is estimated to have averaged 2.8 per cent over the last year.

This economic slowdown is expected to continue into 2012 and 2013. The United Nations baseline forecast for the growth of world gross product (WGP) is 2.6 per cent for 2012 and 3.2 per cent for 2013, which is below the pre-crisis pace of global growth.”

And its adds “Persistent high unemployment in the United States and low wage growth are 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.”

Growth in the euro zone has slowed considerably since the beginning of 2011 and the ever-simmering sovereign debt crisis heavily weighs on consumer and business confidence across Europe.

The failure of policymakers in developed countries to address unemployment and prevent sovereign debt distress and financial sector fragility from escalating has posed the most acute risk for the global economy in the outlook for 2012-2013, with renewed global recession being a distinct possibility.”

Developing Nations Stocking the Engine of World Economy

Meanwhile, 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, according to the report.

Among the major developing countries, growth in China and India is expected to remain robust. 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. 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.”

Low-income countries have experienced only a mild slowdown, the report adds. In per capita terms, income growth slowed from 3.8 per cent in 2010 to 3.5 per cent in 2011 and, despite the global downturn, the poorer countries may see average income growth at or slightly above this rate in 2012 and 2013. The same holds for average growth among the United Nations category of least developed countries (LDCs).

How to Avoid a Double-dip Recession

Against this background, the report discusses several policy directions which could avoid a double-dip recession, including:

optimal design of fiscal policies to stimulate more direct job creation and investment in infrastructure, energy efficiency and sustainable energy supply, and food security;

stronger financial safety nets; better coordination between fiscal and monetary policies; and

the provision of sufficient support to developing countries in addressing the fallout from the crisis and the coordination of policy measures at the international level.

*European Central Bank – Image: ArcCan | Wikimedia Commons 

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2012 Human Wrongs Watch

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