The just released U.N. World Economic Situation and Prospects report states that world economic growth in 2010, premised on the assumption of a continued supportive policy stance, will be a mild 2.4 percent according to its baseline scenario.
Investors should take note: Under this scenario, the level of world economic activity will still be 7 percent below where it could have been if pre-crisis growth had continued.
The recovery will be uneven and conditions for sustained growth will remain fragile. Global economic recovery is expected to remain sluggish, unemployment rates will stay up, and inflation will remain low.
The immediate challenge for policy makers will be to determine how much longer the fiscal stimulus should continue. The U.N. report recommends that the stimulus should continue at least until there are clearer signals of a more robust recovery of employment growth and private sector demand.
Economic growth in the developing world will remain well below the pre-crisis pace of more than 7 per cent per annum. China’s and India’s economies are expected to grow at 8.8 and 6.5 per cent respectively in 2010 but also below potential. The Russian Federation that leads the economies in transition is expected to grow at 1.5 per cent in 2010 after a severe decline of 7 percent this year.
The economy of the United States is expected to grow by 2.1 percent in 2010, following an estimated downturn of 2.5 per cent in 2009. Recovery in both the European Union and Japan is projected to be much weaker, reaching GDP growth of no more than 0.6 and 0.9 per cent, respectively, in 2010.
At this pace of recovery, the major developed economies are not expected to provide a strong impulse to global growth in the near-term outlook.
The report points to two main risks that could cause the global economy to enter into a double-dip recession:
The first is the risk of a premature “exit” from the stimulus measures to prevent further financial sector fallout.
The second relates to the risk of a renewed significant widening of the global macroeconomic imbalances, especially the United States deficit and mounting external debt, which could cause a hard landing for the U.S. dollar and cause a new wave of financial instability.
Policy makers face a dilemma because sustaining the stimulus measures as presently undertaken would lead to a renewed widening of the global imbalances, with the U.S. current account deficit projected to increase to 6.4 per cent of GDP, up from 4.1 per cent in 2009.
Such a return to “business as usual” would support a strong recovery of the world economy in 2010, but it would not last, warns the U.N. report.
Instead, it will lead to an inevitable further weakening of the dollar, but this by itself would not be enough to rebalance the global economy; rather, loss in confidence in the value of the dollar could set off renewed turmoil in financial and commodity markets.
Finally, the U.N. report concludes the world will need strengthened mechanisms for international policy coordination which are more inclusive and legitimate than the present G-20 ad-hoc process.
Also, further reforms of the international financial architecture, including reforms of the global reserve system to a system less reliant on the US dollar as is presently the case, will have to be worked on.
Bottom line: Fasten your seatbelts in 2010.
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