WORLD ECONOMIC SITUATION

The World Economic Situation and Prospects (WESP) as of mid-2012 notes that the global economic situation is still challenging, with heightened risks of a severe downturn. WESP mid2012 warns that global economic growth will likely remain tepid for the rest of the year, with most regions expanding at a below-potential pace. The debt crisis in the euro area remains the biggest threat to the world economy. An escalation could trigger turmoil in financial markets and a sharp rise in global risk aversion, leading to a contraction of economic activity in developed countries and a sharp slowdown in developing countries and economies in transition. Four major weaknesses continue to conspire against robust economic recovery in developed economies, creating a vicious cycle: i) deleveraging by banks, firms and households continues to restrain normal credit flows and consumer and investment demand; ii) unemployment remains high, a condition that is both cause and effect in preventing economic recovery; iii) fiscal austerity responses to rising public debts deter economic growth and make a return to debt sustainability all the more difficult; and iv) bank exposures to sovereign debt perpetuate fragility in the financial sector, which in turn spurs continued deleveraging. The WESP mid-2012 says that to break out of the vicious cycle, more concerted and more coherent efforts on several fronts of national and international policymaking will be needed. First, countries need to shift away from self-defeating fiscal austerity and towards a renewed stimulus, which provides support to weak global demand. Second, fiscal policies need to be redirected to more directly support job creation and green growth. Third, stability of the global monetary and financial system needs to be increased through better coordinated policies and accelerated financial sector reform. And fourth, policymakers need to ensure that sufficient resources are made available to developing countries, especially those possessing limited fiscal space and facing large development needs. These resources will be needed to accelerate progress towards the achievement of the Millennium Development Goals (MDGs) and for investments in sustainable and resilient growth, especially for the least developed countries. The WESP mid-2012 is an update of the WESP released in January 2012.

WORLD ECONOMIC SITUATION

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. 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. 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. 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 20122013. 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. 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). 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.