The United Nations (UN), in its World Economic Situation and Prospects 2011 report, explains why the fragile and uneven global recovery that started in 2009 began to decelerate in the middle of 2010 and lists the myriad of problems that still plagues the economy.

First, although the financial system has stabilized and improved in some ways, it still faces the risks of further deterioration in real estate markets and distress in sovereign debt markets.  Moreover, growth in loans -- from which the financial sector earns a bulk of its profits - - are constrained by weak credit demand and ongoing deleveraging.

 

Meanwhile, private consumption, especially in advanced countries, are held back by persistently high levels of unemployment, which in turn feeds the slump of the real estate market.

 

In the years leading up to the global financial crisis, fiscal deficits have swelled because of

falling government revenues and rising social benefit payments.  This structural problem, not money spent for fiscal stimulus programs, is mainly responsible for sovereign debt problems, stated the UN report. 

 

However, due to the high public debt, policy makers are unable to maintain fiscal stimulus even if such policies make sense for certain countries that face anemic private demand.  The unavailability of this support puts fragile recoveries of these countries at risk.

 

Moreover, the inability to maintain fiscal stimulus forces officials to rely excessively on monetary policy, which has been ultra-loose in developed countries.  This has the unintended consequence of seeding future crises and causing disruptive asset booms (and eventually busts) both within the country and around the world.

 

In particular, the UN report notes the surge in private capital flows to emerging market economies that is caused by strong monetary expansion in the major developed countries, which has induced investors to seek more profitable ventures [in foreign countries].

 

As a result, emerging market economies are worried about the possibility of sudden capital flow reversals and the risk of higher volatility in commodity prices and foreign exchange rates. 

 

Furthermore, emerging market countries, which remain highly dependent on demand in the developed countries for their exports, will have trouble decoupling from the slow growths of advanced countries.

 

Because of all these problems, the UN expects the deceleration of economic growth to continue in 2011 and 2012.  This is in contrast to the view of many other forecasters who think the global economy will expand faster next year.

 

Email Hao Li at hao.li@ibtimes.com