DECEMBER 23, 2012

By Swastika

AS per the UN World Economic Forecasting Model (WEFM), the picture at large following the two years of anaemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn.

Output growth has already slowed considerably during 2011, especially in the developed countries. The baseline forecast foresees continued anemic growth during 2012 and 2013. Such growth is far from sufficient to deal with the continued jobs crises in most developed economies and will drag down income growth in developing countries.

The latest trend indicates towards a serious, renewed global downturn, which is looming because of persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009.

There has been a sharp downturn in the world gross product being 1.5% in 2008 Q4, which became zero in 2009 Q1 and entire 2009 was in dip. However, the US started reviving and from the Q2 of 2009, and as a result the developing economies started picking up. Besides the two fastest growing economies of the world China & India fuelled the growth engine and were the key drivers which helped to sustain the growth.

In 2010-Q4, there was sharp rise in world gross product at 4%, however the euro zone crisis and slowdown in US decelerated the growth track once again. The problems trailing the global economy are manifold and interconnected. The most pushing challenges are the persistent jobs crisis and the declining outlooks for economic growth, especially in the developed countries. Due to high unemployment, at nearly 9 per cent, and stagnant incomes, the recovery is halting in the short term due to the lack of aggregate demand. But, as more and more workers remain out of a job for a long period, medium-term growth prospects also suffer in view to detrimental effect on workers' skills and experience.

The financial turmoil in August 2011 in the United States regarding the debt ceiling and the deepening of the euro zone debt crisis also caused a contagious sell off in equity markets in several major developing countries, leading to sudden withdrawals of capital and pressure on their currencies.

The rapidly cooling economy is both a cause and an effect of the sovereign debt crises in the euro area, and of fiscal problems elsewhere. The sovereign debt crises in a number of European countries worsened in the second half of 2011 and aggravated the weaknesses in the balance sheets of banks sitting on related assets.

Even bold steps by the Governments of the euro area countries to reach an orderly sovereign debt workout for Greece was met with continued financial market turbulence and heightened concerns of debt default in some of the larger economies in the euro zone, Italy in particular. The fiscal austerity measures taken in response are further weakening growth and employment prospects, making fiscal adjustment and the repair of financial sector balance sheets all the more challenging.

On the other hand, even United States economy is facing persistent high unemployment, shaken consumer and business confidence, and financial sector fragility.

The European Union (EU) and the United States of America form the two largest economies in the world, and they are deeply intertwined. Their problems may easily feed into each other and spread to another global recession. Developing countries, this had rebounded strongly from the global recession of 2009 and would be hit through trade and financial channels.

World trade continued to recover in 2011, though at slower pace than in 2010. After a strong recovery of more than 14 per cent in 2010, the volume of world exports in goods decelerated visibly, to 7 per cent, in 2011 .The volume growth of world trade is expected to moderate to about 5.0 per cent in 2012-2013. The dichotomy between a robust growth in trade in emerging economies and a weak one in developed economies will continue.

Growth in the euro area has slowed considerably since the beginning of 2011, and the collapse in confidence evidenced by a wide variety of leading indicators and measures of economic sentiment suggest a further slowing ahead. Under the optimistic assumption that the debt crises can be contained within a few countries, growth is expected to be only marginally positive in the euro area in 2012, with the largest regional economies dangerously close to renewed downturns and the debt-ridden economies in the periphery either in or very close to a protracted recession.

If we see the composite leading indicators released by OECD, they also indicate that though the growth seems to pick up in euro zone and remains firm in Q4 of 2012 along with the five Asian economies. CLIS for Canada, Japan, Russia, Germany, France and the Euro Area as a whole continue to point to weak growth. In Brazil tentative signs have emerged that the positive growth momentum predicted in recent months is dissipating.

Growth in the United States slowed notably in the first half of 2011. Despite a mild rebound in the third quarter of the year, Gross Domestic Product (GDP) is expected to weaken further in 2012 and even a mild contraction is possible during part of the year under the baseline assumptions.

Japan was in another recession in the first half of 2011, resulting largely, from the disasters caused by the March earthquake.

Among the major developing countries, China's and India's GDP growth is expected to remain robust. In China and Italy, on the other hand, signs of turning points in the cycle are beginning to emerge. Tentative signs of a stabilization in growth have also emerged in India. In the United States and the United Kingdom, where consumer confidence picked up strongly last month, the CLI continues to point to economic growth firming.

Failure of policymakers, especially those in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013. A new global recession is just around the corner. The developed economies are on the edge of a downward growth accelerated by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand and policy paralysis caused by political gridlock and institutional deficiencies.