High unemployment, fiscal tightening and risk of currency wars threaten global recovery

New York, 1 December - The recovery of the world economy has started to lose momentum since the middle of 2010, and all indicators point at weaker global economic growth, according to a new United Nations report. The UN expects that the world economy will expand by 3.1 per cent in 2011 and 3.5 per cent in 2012 -- far from sufficient to enable recovering the jobs lost because of the crisis. In a pre-release today of its annual report, the World Economic Situation and Prospects 2011 (WESP), the United Nations emphasizes that the outlook remains uncertain and surrounded by serious downside risks. The cooperative spirit among major economies is waning, which has debilitated the effectiveness of responses to the crisis. Uncoordinated monetary responses, in particular, have become a source of turbulence and uncertainty in financial markets. The recovery may suffer further setbacks if some of the downside risks materialize, in which case a double-dip recession is looming for Europe, Japan and the United States. WESP 2011 says that in the short run more fiscal stimulus will be needed to reinvigorate the recovery, but that it will need to be better coordinated with monetary policies and reoriented to provide stronger support to employment generation and facilitate a sustainable rebalancing of the global economy. This cannot be done without better international policy coordination. Among developed economies, the United States has been on the mend from its longest and deepest recession since World War II. Yet, the pace of recovery has been the weakest in the country's postrecession experience. At 2.6 per cent in 2010, growth is expected to moderate further to 2.2 per cent in 2011 before improving slightly to 2.8 per cent in 2012, according to the report. This pace will not make much of a dent in unemployment rates, and recovering the jobs lost during the crisis would take at least another four years. The growth prospects for Europe and Japan are even dimmer, the report says. Assuming continued, albeit moderate, recovery in Germany, GDP growth in the Euro area is forecast to virtually stagnate at 1.3 per cent in 2011 and 1.9 per cent in 2012. Growth in 2010 was 1.6 per cent. Some countries in Europe will see even less growth, especially where drastic fiscal austerity and continued high unemployment rates are draining domestic demand. This is especially the case in Greece, Ireland, Portugal and Spain, which are entrapped in sovereign debt distress. Their economies will either remain in recession or stagnate in the near term. Japan's initially strong rebound, fuelled by net export growth, started to falter in the course of 2010. Challenged by persistent deflation and elevated public debt, the economy is expected to grow by a meagre 1.1 per cent in 2011 and 1.4 per cent in 2012.download