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US-EU: Economic Crisis Threatens Global Recession, U.N. Warns

Thalif Deen

In November, China's manufacturing output declined for the first time since 2009. Credit: Robert Scoble/CC BY 2.0

In November, China's manufacturing output declined for the first time since 2009. Credit: Robert Scoble/CC BY 2.0

UNITED NATIONS, Dec 1 2011 (IPS) - The United Nations Thursday reaffirmed a lingering fear haunting Western capitals: the world economy is teetering on the brink of another major downturn and heading towards a global economic recession.

In November, China's manufacturing output declined for the first time since 2009. Credit: Robert Scoble/CC BY 2.0

In November, China's manufacturing output declined for the first time since 2009. Credit: Robert Scoble/CC BY 2.0

“The situation is very grim,” Assistant Secretary-General for Economic Development Jomo Kwame Sundaram told reporters, “and it is expected to deteriorate further.”

In its 40-page biannual report titled “World Economic Situation and Prospects 2012” released Thursday, the United Nations painted a rather gloomy picture.

The European Union (EU) and the United States form the world’s two largest economies and they are “deeply intertwined”.

“Their problems could easily feed into each other and spread into another global recession,” the report warned.

The most pressing challenges, according to the report, are the continued job crisis and the declining prospects for economic growth, especially in the developed countries.

“Failure of policy makers, especially those in Europe and the United States, to address the job 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,” the study noted.

Among the major developing countries, growth in China and India is expected to remain “robust”. However, gross domestic product (GDP) in China slowed, from 10.3 percent in 2010 to 9.3 percent in 2011, and is projected to decline further to below 9.0 percent in 2012-2013.

India’s economy is expected to expand between 7.7 percent and 7.9 percent in 2012-2013, down from 8.5 percent in 2010.

Still, developing countries, which had rebounded strongly from the global recession of 2009, “would be hit through trade and financial channels”.

Asked how the eurozone crisis will impact developing nations, Rob Vos, director of development and policy analysis at the U.N. Department of Economic and Social Affairs (DESA), told IPS: “The eurozone crisis is both cause and effect of the economic slowdown in Europe.”

Because of the crisis, he pointed out, fiscal deficits have widened and this has pushed up public debt ratios.

The fiscal austerity measures in response to sovereign debt stress in a context of persistent high unemployment and a clogged banking sector is slowing the European economies and exacerbating sovereign debt stress, he noted.

And the rest of the world is affected through trade and financial channels. Weaker growth is slowing world trade and this is affecting exports of developing countries, Vos said.

Last month, manufacturing output of China declined for the first time since 2009.

Output growth in developing countries will reach 6.0 percent this year, which is already 1.5 percentage points less than in 2010, and it is expected to decelerate further in 2012, mainly as a result of the economic weakness in Europe and the United States.

The sovereign debt distress in Europe, as well as in the United States, has caused financial turmoil worldwide with gyrating stock markets and exchange rates, Vos said.

“It has exacerbated capital flow volatility, with a sudden withdrawal of large sums of portfolio flows in the third quarter of 2011 from many emerging and developing economies putting pressure on their exchange rates,” he said.

The financial uncertainty is also affecting commodity prices, which have come down from highs earlier in the year, but foremost showing greater volatility, he added.

This is complicating macroeconomic management in developing countries and is not conducive to long-term investment in their economic development. The risks for a further slowdown and even a global recession are high, said Vos.

Asked whether the spreading economic crisis will have a negative impact on development aid to the world’s poorer nations, Vos said official development assistance (ODA) was still increasing last year and despite greater fiscal austerity, total flows may still increase during 2011-2013.

“Some individual donor countries have already cut aid in their government budgets, however. In any case, aid delivery will continue to fall well short of commitments made,” he said.

Asked if the crisis will also impact on the voluntary contributions by European nations to U.N. agencies in 2012, he said some agencies have already felt cuts in voluntary contributions from several European donors.

“In some cases these are significant, but it is not yet clear what the overall picture will look like,” Vos added.

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