Press Conference to Launch ‘World Economic Situation and Prospects 2012’ Report

Describing a “rather grim” world economic situation, senior officials of the United Nations Department of Economic and Social Affairs warned today that the global economy was at real risk of a “double‑dip” recession due to a trend towards more fiscal austerity, among other things.

At a Headquarters press conference to launch the report World Economic Situation and Prospects 2012, Jomo Kwame Sundaram, Assistant Secretary‑General for Economic Development, said it provided a baseline in addition to optimistic and pessimistic scenarios, of which the latter was increasingly likely to materialize because of collective action as well as inaction.

Recalling that commitment to strong collective global action had not materialized during the recent G‑20 Summit in Cannes, he said there was no basis for a strong recovery in the developed world, which meant diminished prospects for exports in the developing world.  While the larger members of the latter group had weathered the 2008 crisis, the current situation in China, for instance, was now worse than it had been before the end of that year.

Apart from urgent international action, there was also a need to reverse the seeming trend towards fiscal austerity, which had exacerbated the downturn throughout the world, he said.  But while such a reversal was unlikely to have an immediate effect, further fiscal action in the short term could create conditions for a stronger recovery.  Fiscal efforts could be made if there was a collective recognition of the need to make them less subject to the vagaries of the market, which could be done through collective action in which international financial institutions, including the International Monetary Fund (IMF), would have a “very major” role to play, but that did not seem to be the “collective will”.

He said strong infrastructure and “green” investments could create jobs in the short‑term, thus increasing the aggregate demand essential for economic recovery.  In the longer term, they would create “very important” economic capacities that would form the basis for sustained recovery and growth, he added.  All that required international cooperation and the political will to change the situation, he stressed.

Robert Vos, Director of the Development Policy and Analysis Division, said:  “We are at the brink of a possible new recession,” noting that the report’s baseline forecast stated that, at best, the global economy would “muddle through” in the next two years if the European debt crisis could be contained, and that the situation in the United States would not worsen much more.  However, the risks for a much worse scenario had increased, particularly because of risks and weaknesses in the major developed economies, especially those of the United States and Europe.

He said four interacting factors could lead to a possible downward spiral:  the deteriorating sovereign debt crisis in Europe; distress in the banking sectors; the lack of aggregate demand, caused by persistent high unemployment and the shift by Governments towards greater fiscal austerity; and the “policy paralysis” caused by the different reactions to the situation on the part of policymakers, as well as inadequate actions to reverse it.

Again citing the report’s baseline forecast, he said it projected world economic growth at 2.6 per cent next year, significantly down from the 4 per cent seen in 2010.  However, the baseline was founded on the assumption that the European debt crisis would not deepen, and that an accord could be reached on extending unemployment benefits and payroll tax cuts in the United States, where the lack of agreement on how to adjust the budget and the debt situation had already been taken into account.  Developing economies would also decelerate significantly to 5.6 per cent, almost 2 per cent down from the 2010 growth rate, he said, adding that the 2011 jobs deficit of 64 million, caused by the 2008 crisis, would not see recovery before the end of 2016.

However, things could be worse, he said, noting that the report’s downside scenario projected a dip to 0.5 growth if the debt crisis in Europe worsened and demand weakened due to stronger fiscal austerity measures.  That would result in a significant setback to poverty reduction efforts and realization of the Millennium Development Goals.

The report also warned against premature fiscal austerity and urged internationally coordinated short‑term stimulus measures, he said, adding that the “firepower” of the European Financial Stabilization Facility should be strengthened.  Stimulus must be focused on the creation of jobs by investing in infrastructure as well as through “green” investments, he said.  In such an optimistic scenario, growth could climb back up to 4 per cent and the jobs deficit would gradually dissipate.

Responding to a question about how to influence the political will, Mr. Sundaram said different countries had different problems.  In the United States, Washington was in gridlock, while national constitutions imposed constraints in Europe.  Ideology was also an important factor that had led to the view that fiscal austerity was necessary and that “short‑term pain was necessary for long‑term gain”.  Also, the political leadership was beholden to the financial markets, constantly looking over their shoulders and wondering how they would react.

Emphasizing that a social protection floor called for enhanced fiscal means, he said there was a real opportunity for the United Nations and international financial organizations to play an important supporting role in resolving public finances in the medium and long term, particularly by strengthening the ability of Governments to enhance their tax revenues.  In the short term, however, it was a bad time to enhance fiscal capacities due to the situation of stagnation, he said, adding that international organizations should also start thinking about international public finances.

He said that while it was true that the capacity of the United Nations to influence policymakers had diminished for some time, there had lately been a greater recognition of the Organization’s ability to anticipate problems, through the World Economic Situation and Prospects reports, among other ways.  There had also been a greater place at the table for the world body, as exhibited in Cannes, for instance.  Media coverage could also play a role in enhancing its image, he added.

Asked what could be done immediately to prevent a double‑dip recession, Mr. Vos said more fiscal stimulus was needed to generate aggregate demand.  The firepower of the European Financial Stabilization Facility should be strengthened to ensure the capacity of States to borrow at a reasonable price, rather than the 8 per cent that Italy was forced to pay in order to refinance its sovereign debt.  Additionally, the United States needed further short‑term stimulus, in the form of bridge loans to homeowners so as to avoid more foreclosures, for instance.  All that must be done in an internationally concerted fashion, he stressed.

In response to a question about eurobonds, Mr. Sundaram said there were several proposals, but constitutional constraints on the European Central Bank hindered their implementation.  Agreement on an international facility, not only for Europe, had not materialized in Cannes, and negotiations were still ongoing, albeit behind closed doors.  However, it was crucially important to overcome the divide between Europe and other big developed economies.

Asked about “green” investments, Mr. Vos said that investing in renewable energy, for instance, tended to create employment as the sector was job‑intensive.  However they were longer‑term investments that would not immediately help in addressing the current crisis.  Mr. Sundaram added that more creative thinking was needed on the whole issue since multiple regulations restricted greater “green” investment.

When asked about the impact of protectionism and sanctions on world trade, Mr. Vos acknowledged the existence of some protectionism, but said it was of low intensity and had no effect on global trade growth.  Most sanctions did not affect world trade either as they were narrowly focused on the assets of countries and individuals, he added.

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For information media • not an official record