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Dec 19, 2012, 04.15 PM IST | Source: PTI

UN report warns of second recession on EU, US conditions

The United Nations has lowered global economic growth forecast for the coming two years even as it warned of a new global recession due to the US fiscal cliff situation and EU debt crisis.

The United Nations has lowered global economic growth forecast for the coming two years even as it warned of a new global recession due to the US fiscal cliff situation and EU debt crisis.

It also said inflationary pressures and large fiscal deficit will limit the scope for policy stimulus in India.

The UN's 'World Economic Situation and Prospects 2013' report released yesterday said growth of the world economy has weakened considerably during 2012 and is expected to remain "subdued" in 2013 and 2014.

The global economy is expected to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014, a downgrade from the UN's forecast six months ago when the world body had predicted a 2.7 per cent growth for 2013 and 3.9 per cent for the year after.

Must read: US 'fiscal cliff' deal closer, but gaps remain

Asia's growth engines, China and India, have also shifted into "lower gear".

India, which had grown at 6.9 per cent in 2011, will see its growth drop significantly to 5.5 per cent in 2012. The growth rate is expected to pick up pace in 2013 when the Indian economy is forecast to grow by 6.1 per cent and 6.5 per cent in 2014, the report said.

"Both China and India face a number of structural challenges hampering growth. Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other South Asian countries is limited," the report added.

GDP growth in South Asia is expected to average five per cent in 2013, up from 4.4 per cent of 2012, led by a moderate recovery of India's economy but still well below potential, the report added.

Weaknesses in the major developed economies such as US and Europe are at the root of the global economic slowdown, it said.

The UN report warned that the pace of growth in the global economy would be far from sufficient to overcome the continued jobs crisis that many countries are still facing.

"With existing policies and growth trends, it may take at least another five years for Europe and the US to make up for the job losses caused by the Great Recession of 2008-2009," it said.

"A worsening of the euro area crisis, the 'fiscal cliff' in the United States and a hard landing in China could cause a new global recession. Each of these risks could cause global output losses of between one and three per cent," UN's team leader for the report Rob Vos said.

Major developed economies, particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth, the report said. Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12 per cent this year.

According to the United Nations forecast, the euro area economy is expected to grow by only 0.3 per cent in 2013 and 1.4 per cent in  2014, a feeble recovery from the 0.5 per cent decline in 2012.

Growth prospects for the US economy in 2013 and 2014 remain sluggish. The US economy also slowed significantly during 2012 and growth is expected to remain meagre at 1.7 per cent in 2013, decelerating from an already anaemic pace of 2.1 per cent in 2012, the UN report said.

"Risks remain high for a much bleaker scenario, emanating from the "fiscal cliff", which would entail a drop in aggregate demand by as much as 4 per cent of GDP during 2013 and 2014. It will be also due to "spillover effects of a further intensification of the euro area crisis and a possible hard landing of the Chinese economy and further weakening of other major developing economies," the report said.

The economic woes in Europe, Japan and the US are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices.

Labour conflicts also constitute a major downside risk to the economic performance of a region. Gender disparity in employment remains acute in South Asia with female labour force participation rate in India and Pakistan much lower than that of males.

The UN report said present policy stances fall short of the requirement to spur economic recovery and address the jobs crisis. "It is essential to change course in fiscal policy and shift the focus from short-term consolidation to robust economic growth with medium to long-term fiscal sustainability," it said.

The report advised that premature fiscal austerity should be avoided and, while necessary, fiscal consolidation should focus on medium-term, rather than short-term adjustment.

"The reorientation of fiscal policies should be internationally coordinated and aligned with structural policies that support direct job creation and green growth.

"Monetary policies (also need to) be better coordinated internationally and regulatory reforms of financial sectors be accelerated in order to stem exchange rate and capital flow volatility, which pose risks to the economic prospects of developing countries," it said.

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