UNESCAP has released its World Economic Situation report for 2013, showing that the world economy has continued to weaken in 2012 with many of the developed countries in deep recession. The spiralling effect of this situation is seen in emerging economies with reduced exports and greater volatility in capital flows and commodity prices.
The report cautions that the next two years will continue to be challenging with risks slanted towards the downside. Growth of World Gross Product (WGP) in the developed countries is expected to be 2.2% in 2012 and forecast to be at 2.4% in 2013 and 3.2% in 2014 making it difficult for many economies to recover the severe job losses. What is also frightening is the prediction that if there is no strong economic growth, employment rates in the West will not return to pre-crisis levels until 2016.
The global slowdown will also slow down the achievement of Millennium Development Goals (MDG) particularly due to the slower pace of poverty reduction. While inflation is reported to have receded in a majority of developing countries, anticipated increases in world food prices due to drought in producer countries and high oil prices, will be a worrying factor in 2013 and 2014.
Inflation is still a concern for most countries in South Asia where inflation rates were over 11% in 2012 on average and are forecast to remain above or near 10% in 2013 and 2014. Food prices are expected to moderate due to slowing global demand and weather conditions being favourable. But the report cautions that since markets are tight and stocks to use ratios for most staple foods are low, even relatively minor supply shocks could result in price spikes.
World trade growth had continued to fall from 12.6% in 2010 to 6.4% in 2011 and 3.2% in 2012. Although the reason for this fall was the situation in the developed countries, developing countries fared better and their integration in global value chains have continued to increase. Preliminary statistics from OECD indicate that Country Programmable Aid (CPA) is expected to stagnate from 2013-2015 reflecting the delayed impact of the global economic crisis and fiscal policy responses of donor countries.
In the services sector, carbon emission intensive transport and travel sectors keep expanding in developing countries, particularly in freight transport services due to expansion of global value chains. Although expanding freight transport is important as a foreign exchange earner, particularly to developing countries, it is also causing the increase of greenhouse gas emissions and the report urges policymakers worldwide to pay greater attention to this negative effect of production through global value chains.
In the past, global recessions were caused mainly due to adverse conditions in the developed countries. But with the emerging economies playing a global leadership role, they could cause a new global recession according to this report.
In addition to the worsening of the euro area crisis and the “fiscal cliff” in the US, a “hard landing” of the economic growth in one or more of the large developing countries could cause a major global crisis. Noting that Brazil, India and China, which enjoyed long periods of rapid growth prior to the global slowdown, are now slowing down, the report states that a slowdown in economic growth in China could result in a cumulative output loss not only in the developing countries, but the world as a whole.
According to ESCAP, current policy stances seem to be insufficient to prevent the global economy from slipping into another recession. Among the recommendations to avoid such a situation are; fiscal adjustment to provide more direct support to output and employment growth by boosting aggregate demand and at the same time spread out plans to achieve fiscal sustainability over the medium to long term., fiscal policy to be more countercyclical and more supportive of jobs creation and more equitable. Finally, economic recovery can be strengthened in the short and longer run by promoting green growth through fiscal incentives and investments in infrastructure and new technologies.
According to the report, continuing with the existing policies on the assumption of no major deepening of the global crisis, growth of WGP would at best average about 3% per year, which is insufficient for recovery while the recommended options could accelerate world economic growth to 4.5% per year between 2013 and 2017.
This valuable report is worth a study by policy makers
(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)