World Economic Situation and Prospects 2011

The road to recovery from the Great Recession is proving to be long, winding and rocky. After a year of fragile and uneven recovery, growth of the world economy is now decelerating on a broad front, presaging weaker global growth in the outlook. Weaknesses in major developed economies continue to drag the global recovery and pose risks for world economic stability in the coming years. There will be no quick fix for the problems these economies are still facing in the aftermath of the financial crisis. The unprecedented scale of the policy measures taken by Governments during the early stage of the crisis has no doubt helped stabilize financial markets and jump-start a recovery, but overcoming the structural problems that led to the crisis and those that were created by it is proving much more challenging and will be a lengthy process. For example, despite the notable progress made by the banking sector in disposing of its troubled assets, many of the banks in major developed countries remain vulnerable to multiple risks. Those risks include a further deterioration in real estate markets, more distress in sovereign debt markets, and continued low credit growth associated with overall economic weakness and the ongoing deleveraging among firms and households. Persistent high levels of unemployment, with increasing numbers of workers that have been without a job for prolonged periods, are restraining private consumption demand; they are also a continued cause of increasing housing foreclosures, which are adding to the fragility of the financial system. Troubles with public finances have become daunting as well. Fiscal deficits have widened dramatically and have become a source of political contention. Deficits have increased, mainly as a consequence of the impact of the crisis on falling government revenues and rising social benefit payments. The costs of fiscal stimulus measures have compounded this situation but, contrary to popular belief, have contributed only in minor part to the increase in public indebtedness. Yet, rising public debt has engendered political and financial stress in a number of European countries and, more broadly, has undermined support for further fiscal stimuli. However, as Governments shift from fiscal stimulus to austerity, the recovery process is being placed in further jeopardy. The fiscal consolidation plans that have been announced so far by Governments of developed countries will impact negatively on gross domestic product (GDP) growth in the outlook for 2011 and 2012.download