UN report calls on affluent countries to halt austerity to avoid double-dip recession

The world risks falling back into recession if developed countries embark prematurely on fiscal austerity measures, according to a United Nations report released today in New York, which recommends additional stimulus measures as well as more forceful international coordination to stimulate job creation and investment.

The report on global economic prospects, released by the UN Department of Economic and Social Affairs (DESA), states that fiscal austerity measures implemented in developed countries and elsewhere in response to high levels of fiscal deficit and public debt are further weakening growth and job prospects.

Calling 2012 a “make-or-break” year for the economy, the report forecasts a “muddle-through” scenario, in which the world economy will continue to grow at a slow pace, at about 2.6 per cent next year and 3.2 per cent for 2013, down from 4.0 per cent in 2010. However, the report says this will only happen if the Eurozone debt crisis is contained, and if further moves toward stringent fiscal austerity in developed countries come to a halt.

“Failure of policy-makers, especially those in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013,” warns the report.

The report underscores four mutually reinforcing factors that are weakening the global economy: sovereign debt distress; fragile banking sectors; weak aggregate demand associated with fiscal austerity measures and high unemployment; and policy paralysis caused by political gridlock. If one of them worsens, the report warns, there is a high risk of setting off “a vicious circle leading to severe financial turmoil and economic downturn.”

The report stresses that slower growth in developed countries is also affecting developing countries, which have seen a slowing down in their growth since April.

“The European Union (EU) and the United States form the two largest economies in the world and they are deeply intertwined. Their problems would easily feed into each other and spread into another global recession. Developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels,” the report reads.

Brazil and Mexico are expected to be more visibly affected by this economic slowdown, while growth in India and China is expected to remain robust.

The report estimates that there was an unemployment deficit of 64 million jobs worldwide this year. This figure refers to the amount of jobs that would need to be created to restore pre-crisis employment levels and absorb young people coming into the workforce.

If economic growth stays at current levels, the report estimates the unemployment deficit will not be closed until far beyond 2015.

The report says additional fiscal stimulus measures in many countries are still possible, but would need to be accompanied by regulatory reforms to the financial sector, increased resources for financial safety nets – especially in Europe – and measures to prevent a second round of mortgage crises in countries with a high risk of home foreclosure.