Global GDP per capita could shrink, warns UN

Thursday, 19 January 2012 00:46 - - {{hitsCtrl.values.hits}}

Reuters: The global economy will grow by only 0.5 per cent in 2012, effectively shrinking on a per capita basis, unless there is rapid action to create jobs, prevent sovereign debt distress and shore up fragile banks, a United Nations study said on Tuesday.

The annual UN World Economic Situation and Prospects report forecast average economic growth of 2.6 per cent in 2012 and 3.2 per cent in 2013, assuming what it said were benign conditions in a “make-or-break year” for economic recovery.

The assumptions included a 50 per cent cut in Greek sovereign debt, a minor US economic stimulus in the short term and a realisation of economic policy commitments taken by the G20 group of nations at Cannes in November.

The report said these would at least allow developed economies to “muddle through” but there was a high risk that these assumptions would be overly optimistic.

“The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional difficulties,” the report said.

“All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn.”

In the downside scenario, economic growth of only 0.5 per cent would not keep pace with population growth, resulting in a downturn in average per capita income for the world.

In the downside scenario, the European Union economy would contract by 1.6 per cent in 2012, with Germany, France and Britain all sliding into recession.

But the biggest loser from the downside scenario would be Russia, with a baseline forecast of 3.9 per cent GDP growth in 2012 flipping to a 3.6 per cent contraction, especially if oil prices were to fall just as the presidential election spurs new social and public spending.

The report also forecast an increase in world trade of 4.4 per cent in 2012 and 5.7 per cent in 2013, compared with an estimated 6.6 per cent increase in 2011.