On 11 February, ECOSOC held a briefing on the current global economic challenges based on the findings of the recently released World Economic Situation and Prospects (WESP) report 2013. The report is jointly produced by the UN DESA, the UNCTAD and the five United Nations regional commissions, with the purpose of defining the state of the world economy today and identifying root causes that restrain global growth in some regions through a data and trends compilation up to the third quarter of 2012. The report also serves as a platform of discussion for structural policy changes to contribute towards sustainable growth in both developed and developing countries.
The briefing on the report was chaired by ECOSOC President Néstor Osorio (Colombia); presentations of key findings were made by the Assistant Secretary-General for Economic Development Shamshad Akhtar and by Pingfan Hong of UN DESA’s Development Policy and Analysis Division.
The presentation was structured along the thematic arrangement of the report itself:
1) Prospects for global economic growth and sustainable development
2) International trade commodity prices
3) International financing for development
4) a Regional Development outlook.
As an introduction, Ms. Akhtar pointed out that “this crisis has had an innate ability to take twists and turns.” The economic downfall of developed countries has affected enormously developing countries and economies in transition by weakening demand of their exports and contributing to deeper volatility in commodity prices and capital flows.
Prospects for global economic growth and sustainable development and key recommendations
World economic growth is expected to remain subdued in upcoming years as in 2012. According to the WESP Report, the global economy is estimated to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014. Developed economies — mostly from the European Union (EU) — are going to be the most affected as some of them have already fallen into a double-dip recession even after the implementation of economic adjustment policies. The report made clear that weaknesses in major developed economies, particularly those in Europe, may constitute root causes of a global economic slowdown. The WESP considers most European economies trapped in a vicious cycle of high unemployment, financial sector fragility, fiscal austerity and low growth. Though overall global growth is projected to pick up slightly, risks remain during the next two years, which will particularly strain developing countries.
In terms of recommendations, the report strongly demanded concerted policy action at the international level as a key factor to reduce the possibilities of global economy from falling into another recession. Though these efforts may not be easy to accomplish, according to the report, they would provide opportunities to align policy actions with long-term sustainable development objectives. Other provisions referred to making fiscal policies more supportive of jobs creation and green growth (see below).
Weakening and highly uncertain outlook for the world economy
The report also forecasts two potential scenarios generated from the Baseline trend line which is expected to have a moderated growth of 2.4 per cent in 2013. The Policy scenario projects a growth of world gross product to about 4.5 per cent per year if economies are able to integrate internationally concerted strategies into their national policies. Finally, the Downside scenario is illustrated as an alternate baseline outlook, which could be subject to uncertainties and risks. Mr. Hong identified the deterioration of the euro crisis, the US fiscal cliff, and the continued deceleration of investment as major risks could cause the global economy to fall into another Great Recession.
The report also projected that unemployment would continue at relatively high levels in developed economies, particularly in some EU countries that previously reached a record high of nearly 12 per cent during 2012. In developing economies, the situation varies significantly from country to country, where economies in East Asia and Latin America have retreated level of unemployment prior to world’s financial crisis, even though youth employment and gender disparities in jobs still remain as key economic and social concerns in these regions. The report also considers more sustainable job creation as a key policy priority for developed economies.
In terms of poverty, the report portrays a slow pace for its reduction in many devolving countries along with a narrowing fiscal space for investments in strategic areas such education, health assistance, and others of critical importance in order to accelerate the achievement of the Millennium Development Goals (MDGs). Overall, the process of poverty reduction and progress towards MDGs achievement may slow during 2013.
Annual consumer price inflation rate in developed and developing countries
The WESP report indicates that rates of inflation may perhaps remain subdued in most developed countries, due to continue large output gaps and downward pressure on salaries. Inflation rates are receding in most, but not all, developing countries. The report anticipates that the increase in world food prices provoked by droughts and high oil prices may produce some pressure towards inflation during 2013 and 2014 in these countries.
International trade commodity prices
In terms of international trade and commodity prices, the report projects that the trade sector will remain decelerated below its potential at least for the time being. External demand will continue to be subdued in developed countries, while patterns will change for developing countries. Commodity prices will remain high and volatile.
International financing for development
The report clearly states that after years of crisis the financial system remains volatile, though it also recognizes that international community has been adopting measures to address some of the vulnerabilities of the system. Substantive financing, from both private and public sectors, will be necessary to meet persistent development challenges in terms of climate change and the achievement of the MDGs.
Foreign Direct Investment (FDI) still constitutes a major component of private capital flow in developing countries. According to the report, FDI decreased in 2012, where it remains concentrated in specific regions and countries.The report also acknowledges, in chapter 4, that “overall levels of FDI flowing from developing and transition economies remained high from a historical perspective.” The increasing tendency of FDI towards short-term orientation may contribute to its volatility, the report continued.
Remittances represent an important source of foreign exchange earnings for many developing countries; according to the report, remittances increased by 6.5 per cent during 2012. In this regard, it was recommended that remittances become a stable form of financing for development.
Regional development outlook
The report portends bleak prospects for the European region, due to the sovereign debt crisis, fiscal austerity programmes, and slowing external demand continuing to depress growth. Some policies have been adopted by the European Central Bank, including the Outright Monetary Transactions (OMT) programme and those towards greater fiscal coordination and financial supervision. However, the report states that there are insufficient policies for tacking crisis in labour markets and increasing growth rates. The report forecasts euro zone to grow by only 0.3 per cent in 2013 and 1.4 per cent in 2014
The United States economy weakened notably during 2012, though the housing sector has shown some sings of recovery; for 2013 and 2014, growth is projected to be slow. Risks still emanate from a “fiscal cliff” which would possibly entail a drop in aggregate demand. External demand is will most likely be feeble during 2013.
According to the report, Japan’s economy is expected to grow slowly, at about 0.6 per cent in 2013, due to the adoption of governmental policies of stimulation of private consumption and the new measure of increasing tax on consumption and cutting of governmental spending.
Developing Asia economies slowed in 2012, due to a significant deceleration of exports in the region’s growth engines, China and India. The report considers capacity in India and other South Asian countries for policy stimulus to be quite limited due to inflationary pressures and large fiscal deficits, while China and other East Asian economies have now greater space for countercyclical policies to be adopted. According to the WESP report, East Asia economies forecast to grow approximately 6.2 per cent, while South Asia is estimated to grow 5.0 per cent in 2013.
Economies in Africa are estimated to have moderate growth in 2013, to 4.8 per cent, according to the report. Growth during 2012 should continue, due to the strong performance of oil exporting countries along with fiscal spending on infrastructure projects and the expansion of economic ties with other regions.
The region of Latin America and the Caribbean displayed weak GDP growth during 2012, due to weak export demand and lower prices of non-food commodities in region’s exports. The WESP report forecasts GDP growth of 3.89 per cent in 2013 within the region.
According to the report, the Russian Federation as well as other Commonwealth of Independent States had a very robust economic performance for most of 2012. Firm commodity prices, particularly of oil and natural gas, led to significant growth in energy-exporting economies. The WESP report forecast GDP of CIS to grow 3.8 per cent during 2013.
Key policy recommendations
New policy initiatives adopted by major economies in past years have significantly improved the situation of global financial markets; however, “uncertainties and downside risks could remain elevated in almost every region during the current year,” warned Ms. Akthar at the briefing.
The WESP report called upon for more concerted policy action at the international level. In fact, it stressed the necessity of reorienting fiscal policies in conjunction with structural policies that support job creation and green growth. The report vigorously recommended international coordination among monetary policies and the urge of regulatory reforms on financial sectors in order to stem exchange change and capital flow volatility, as they remain major risks for economic prospects of the coming years.
The report also recognized the necessity of providing developing countries with sufficient resources, particularly those processing limited fiscal space and facing large development needs, as they will contribute to accelerate the process of achieving the MDGs and investing in sustainable growth. It also emphasized the necessity of securing assistance to least developed countries with the purpose of accelerating their progress towards poverty reduction.