Global economy to witness weaker growth next year: UN

The global economic recovery had started losing momentum from mid-2010 and all the indicators point to weaker growth next year, said a report by the United Nations on Wednesday.

“The speed of recovery had started to decelerate in the middle of this year, particularly owing to weaknesses in the major developed economies. We’re not out of the woods yet, and major risks are still looming,” said Robert Vos, director of the development policy and analysis division of the UN Department of Economic and Social Affairs (DESA).

According to the UN, the global economy is expected to grow at the rate of 3.1 percent in 2011 compared with an expected growth of 3.6 percent in 2010. However, the UN forecasts a growth of 3.5 percent in 2012.

The report projects U.S. economic growth at 2.3 percent next year, down 0.3 percent from its forecast in May. Growth in eurozone and Japan is expected to be weaker at 1.3 percent and 1.1 percent respectively.

The annual report titled the 'World Economic Situation and Prospects 2011' (WESP) identifies high unemployment, fiscal tightening, and currency wars as the major risks to recovery of world economy next year.

“The current global financial situation was characterized by a weakening dollar, increasingly volatile exchange rates and much “finger-pointing” over those rates,” said Vos.

Further, the global recovery is hurt by lack of lending due to the banking crisis and stimulus withdrawal in many countries, the report said.

The report found that unemployment rates returning to pre-crisis levels by the end of first quarter of 2010, though they had begun to rebound from the second half of 2009.

Global financial crisis had led to 30 million job losses between 2007 and 2009. The global economy still needs at least 22 more million jobs for the employment rates to reach pre-crisis levels.

The output growth in the emerging economies, which continued to drive to the global recovery, is expected to moderate next year. These economies will be impacted by a slowdown in the developed countries and withdrawal of stimulus measures, Vos said.

Besides, excess liquidity in the global economy moving into the developing countries is expected cause risks of volatile capital flows and less competitive currencies.

US Federal Reserve’s quantitative easing recently had put downward pressure on the dollar. Increased tensions over currency and trade could trigger renewed economic turmoil in financial markets, the report said.

“One of the dangers of the practice was that it might not sufficiently stimulate the economy. Additionally, it had put further downward pressure on the dollar and had created an excess of capital in the world market, which could inflate dangerous “bubbles” in developing economies,” Vos said.

Finally, the report concluded stating that key policy challenges must be addressed for more balanced and sustainable global economic recovery such as increased fiscal stimuli; a redesigned fiscal stimulus focusing on job growth; better monetary stimulus policies; sufficient financing for developing countries; and a strengthened framework for international policy coordination.

Regarding commodities prices next year, especially expected food price volatility in least developed nations, Vos said that unstable global exchange rates were a driving factor in food price fluctuations, as producers did not know what to expect.

“There are a lot of spillover effects from the financial uncertainty and instability in financial markets onto commodity markets,” he said.