World recovery slows, will be hit by austerity: U.N.

By Patrick Worsnip

UNITED NATIONS (BestGrowthStock) – The world’s recovery from the 2008 financial crisis is losing steam, with growth, hit by austerity drives in rich countries, not enough to restore the 30 million lost jobs in the next two years, the United Nations said on Wednesday.

“The road to recovery from the Great Recession is proving to be long, winding and rocky,” said an annual U.N. survey, “World Economic Situation and Prospects 2011.”

“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.”

The report forecast that, after a better-than-expected rate of 3.6 percent this year, the world economy’s growth would slow to just 3.1 percent next year — slightly less than a mid-year U.N. review predicted in May — and 3.5 percent in 2012.

The projections were broadly in line with those issued in the past two months by the International Monetary Fund and the Organization for Economic Cooperation and Development, which both forecast a 4.2 percent rise next year.

U.N. economists said the discrepancy with their figures was mainly due to different ways of calculating exchange rates.

The report said U.S. economic growth was expected to be 2.3 percent next year — a drop of 0.3 percent on its May forecast — after 2.6 percent this year. Growth would be still weaker in the euro zone at 1.3 percent, and Japan at 1.1 percent.

The recovery will continue to be driven by developing countries — led by China, India and Brazil — which had contributed to more than half of global expansion since late 2009, the U.N. report said. But even their growth was expected to slow to around 6 percent over the next two years.

“The core message is that no, we’re not out of the woods yet and still major risks are looming,” the report’s lead author, Rob Vos, told reporters.

Tax hikes and spending cuts were also worsening unemployment, the report said. Saying at least 30 million jobs had been lost worldwide due to the financial crisis, it predicted that it would take some five years to restore them.

NO QUICK FIX

Weaknesses in developed economies, including sluggish growth in the United States and debt crises on the periphery of Europe, were dragging down the global recovery and posing risks for world economic stability, it said.

“There will be no quick fix for the problems these economies are still facing in the aftermath of the (2008) financial crisis,” it said.

The report implicitly faulted nations that have dropped stimulus packages in favor of slashing budgets. “As governments shift from fiscal stimulus to austerity, the recovery process is being placed in further jeopardy,” it said.

Repeating long-standing U.N. calls for more international coordination of economic policy, the report urged more stimulus “to reignite the global economy.” Its cost would be “low relative to the growth risk of fiscal consolidation,” it said.

“Withdrawal of stimulus is understandable given the large fiscal deficits and the mounting public debt in many of the developed countries, but at the same time we see there’s still a lot of fiscal space available for more stimulus,” Vos said.

Focusing on debt reduction without stimulus could be a “self-defeating strategy” because failing growth rates could worsen debt problems, he said.

The report also queried the policy of “quantitative easing” — or pumping money into the economy by buying government debt. The U.S. Federal Reserve announced a program on November 3 to buy $600 billion in government bonds by mid-2011.

“Further quantitative easing and a further depreciation of the dollar could be a way for the United States to try to inflate and export its way out of its large foreign liability position,” the report said. “But it could more likely risk disruption of trade and financial markets.”

On the positive side, the report said inflation was likely to remain low around the world for the next two years, except in a few Asian economies, while world trade continued to recover in 2010, although momentum slowed in the second half.

(Editing by Philip Barbara)

World recovery slows, will be hit by austerity: U.N.