Despite improved global financial conditions and reduced short-term risks, the world economy continues to expand at a subdued pace. Global economic activity is expected to gain momentum slowly in the second half of 2013 and 2014 on the back of accommodative monetary policies in developed and developing economies. In southern Africa, growth is expected to strengthen only slowly, pulled down by South Africa, which faces massive labour market challenges.
The United Nations World Economic Situation and Prospects (WESP) 2013 mid-year update notes that, since late 2012, new policy initiatives in major developed economies have reduced systemic risks and helped stabilise consumer, business and investor confidence – but with very limited improvement in economic growth.
Most world regions are likely to see a moderate pick-up in activity, but growth will continue to be below potential; employment gains, particularly in developed economies, will remain weak at best.
The short-term risks associated with the situation in the euro area, the fiscal adjustments in the United States and the economic slowdown in large developing countries have diminished but not disappeared, the report states.
At the same time, new medium-term risks have emerged, including possible adverse effects of unconventional monetary measures in developed economies on global financial stability. These risks have the potential to derail once again the feeble recovery of the world economy.
The priority for policy-makers worldwide should therefore be to support a robust and balanced global recovery, with a focus on promoting job creation. International policy co-ordination needs to be enhanced to mitigate negative policy spillovers, curb protectionism, promote co-operation in reforming the international financial system, and ensure sufficient resource flows to developing economies – and in particular the least developed countries.
The report warns that several key risks and uncertainties remain and, if not mitigated, could derail global growth once more as in the past few years.
Since late 2012, several new policy initiatives in major developed economies have reduced systemic risks and helped stabilise consumer, business and investor confidence, but with very limited impacts on growth. In the euro area, sovereign bond risk premia of debt-distressed countries have fallen notably, but the real economy is held back by austerity programmes, weak bank lending and continued uncertainty. Only a very gradual recovery is expected as these factors diminish.
It is noted that developing countries and economies in transition continue to register much stronger growth than developed economies.
In response to the economic slowdown in 2012, many of these countries – including some large nations in East Asia, South Asia and Latin America – have adopted more expansionary monetary and, to a lesser extent, fiscal policies to strengthen domestic demand. This, along with a slight upturn in external demand, should provide a lift to economic growth in 2013.
The pick-up in growth will, however, be slower than previously estimated as many large economies in this group, including Brazil, China, India and Russia, face significant structural challenges.
Africais expected to grow by 4.6% this year and 5.1% in 2014. This implies a very moderate downward revision by 0.2 percentage points for the current year, mostly owing to the negative impact of the slowdown in economic activity in developed economies. Over the forecast horizon, growth drivers include further increases in output in the natural resources sector, which underpins rising fiscal expenditure, especially in infrastructure projects. West Africa, in particular Nigeria, will benefit from continued high oil prices, despite some declines in output.
Growth is expected to strengthen only slowly in southern Africa, pulled down by South Africa, which faces massive labour market challenges. High unemployment combined with huge underemployment continue to constitute a major policy challenge in many countries.
The report notes that employment remains a key policy challenge in a large number of economies as the world economy continues to expand well below its potential.
Among developed countries, unemployment is most severe in parts of the euro area, which continues to see sharp contractions of economic activity amid stringent fiscal austerity programmes. In early 2013, the unemployment rate increased to 26.7% in Spain and 27.2% in Greece, with youth unemployment rates exceeding 59%. In addition, unemployment is still on the rise in other euro area countries such as Belgium, Finland, France and Italy.
The unemployment rate in the US has fallen, but is still high by historical standards; the drop partly reflects a significant decline in labour force participation. Long-term unemployment remains near historic highs.
In most developing regions, labour markets have not suffered as extensively from weak demand as in developed economies. In some emerging economies, unemployment rates have dropped below the levels seen before the financial crisis, particularly in South America and East Asia.
By contrast, employment continues to be a key problem in many African countries, despite relatively high growth rates over the past few years. Importantly, developing countries face many structural labour-market challenges such as low participation rates, particularly among women; high youth unemployment; large informal sectors; high numbers of low-quality jobs and slow productivity growth.
The world economy continues to face significant uncertainty, with risks still tilted to the downside.
The World Economic Situation and Prospects 2013 released in January examined three major global risks: a substantial worsening of the euro area crisis; the US falling off the fiscal cliff; and a hard landing for some large developing economies. The report noted that there has been improvement in some of these areas, with short-term risks diminishing but not disappearing, warning that new risks and uncertainties have emerged particularly for the medium run:
- The ever expanding monetary measures adopted in developed economies could have significant adverse effects on financial stability in the future.
- A prolonged period of subdued growth in many economies with high unemployment and inadequate investment might have led to noticeably lower potential output in the world in the medium term; and
- Other risks, including those beyond the economic domain, such as geopolitical risks and natural disasters.
These new risks have the potential to derail the still feeble global recovery. This could lead to much lower growth in the world economy than that projected in the baseline outlook, the report states.