CRISIS FOCUS Cloudy Outlook

CRISIS FOCUS Cloudy Outlook

Amid uncertainties facing the world economy, one thing is clear: There’s no easy way out of the current global predicament. While the European debt crisis calls global recovery into question, woes on the employment front continue to stretch the nerves of policymakers. The 2010 World Economic Situation and Prospects, a recent report by the Department of Social and Economic Affairs of the United Nations, discussed these issues. Edited excerpts follow:

Having fallen into the most severe recession since World War II, the world economy is on its way to recovery. World GDP is expected to grow by 3 percent in 2010 and 3.1 percent in 2011. The pace of the recovery, however, remains subdued. It is far from suffcient to recuperate the job losses and close the output gap created by the deep recession.

Weaknesses in the global economy remain. Despite the large amounts of liquidity injected into the fnancial system, credit fows to non-fnancial sectors in many economies remain restrained. While the rebound in equity prices has mitigated the losses of many fnancial institutions, the process of establishing sounder balance sheets through write offs of troubled assets and de-leveraging is still ongoing. At the same time, public fnances of many developed countries have deteriorated rapidly due to the impact of the crisis and the policy responses. In some—Greece, Portugal, Spain and Ireland, for example—such fnances have already become a new source of fnancial instability.

The recovery is also uneven across countries. In most developed countries, private sector activity has yet to gain a solid footing. Facing elevated unemployment rates, soaring public debt and limited credit fows, growth prospects for most developed economies remain lackluster, unable to provide a suffcient impetus to the global economy. While developing Asia, particularly China and India, is leading the way among developing countries, the recovery is much more subdued in many economies in Africa and Latin America.

The risk of a protracted period of mediocre growth for the world economy remains high in the aftermath of the global fnancial crisis. This poses new policy challenges. In the near term, policy support remains essential for solidifying and broadening the global recovery. One key area is to strengthen support for boosting employment. A robust recovery in jobs is crucial to recovery in effective demand, which in turn will help reduce budget defcits. An increasing number of countries have stepped up efforts to stimulate job creation, such as through subsidies to frms that hire new workers and enhanced reemployment programs for the unemployed. However, more needs to be done to link aggregate demand management and labor market policies to ensure a much more jobintensive recovery.

A number of uncertainties and risks cloud the global economic outlook, in particular those associated with rising public sector debt in major economies. The countries involved have already scheduled severe fscal cuts to redress the situation. With the withdrawal of fscal support, the recession in these economies will be prolonged during 2010 and possibly beyond, making a return to fscal sustainability an even bigger challenge. A premature move to fscal consolidation at this stage of the recovery would risk lower growth and tax revenue, thereby possibly exacerbating fscal diffculties and causing the public debt ratio to rise even further. For most countries, it remains important to maintain fscal stimulus measures until a marked recovery can take place.