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Euro Debt Crisis May Grind World Economy to a Halt, UN Says

Thursday, 01 Dec 2011 02:30 PM

The world economy would grind to a standstill should the 17-nation euro economy fail to overcome its sovereign-debt crisis, as risks of a double-dip recession in the U.S. and Europe loom, the United Nations said.

In a worst-case scenario, where European leaders cannot prevent a member state from defaulting on its debt, the U.S. and Europe will plunge back into recession and the world economy will only grow 0.5 percent next year, according to UN forecasts released today that slash growth predictions made in May.

“There is a danger that the unthinkable is now thinkable,” UN chief economist Rob Vos said in an interview. He said there is a 50 percent chance of the more pessimistic scenario materializing, citing an unraveling Italy as the biggest concern for policy makers.
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Should the debt crisis not be contained, the UN 2012 world growth predictions drop by 2.1 percentage points, with the 27-nation European Union contracting 1.6 percent and the U.S. economy shrinking 0.8 percent.

This week, six central banks led by the U.S. Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis. In Europe, Germany has been resisted pressure to broaden the role of the European Central Bank to save the euro area’s economy.

To prevent Italy, the euro area’s third-biggest economy from succumbing to the debt crisis, the country’s new government will unveil emergency austerity measures next week.

On the Brink

“The developed economies are on the brink of a downward spiral,” according to the report.

Apart from the containment of the sovereign-debt crisis, more optimistic UN predictions also hinge on the U.S. being able to pull off a debt reduction package to cut $1.2 trillion in government spending over the next decade and on Congress extending lower payroll tax rates.

In this scenario, U.S. projections for 2011 and 2012 were still revised downward by 0.9 percentage points, to growth of 1.7 percent this year and 1.5 percent for 2012. The U.S. unemployment rate has been near 9 percent or higher for more than two years.

“Continued high unemployment is at the core of the problem,” Vos said. “It’s keeping demand down. It’s threatening to create more problems in the housing market and spark more foreclosures.”

‘Ominous’ Signs

Growth in emerging economic superpowers, China and India, is preventing the world economy from dipping into recession, the forecasts show. In a situation where Europe overcomes its debt woes, the world economy will “muddle through” and expand 2.6 percent, the report said.

Still, the UN top economists said there are “ominous” signs ahead for the fastest-growing economies sustaining world growth. China’s manufacturing today recorded the weakest performance since the global recession eased in 2009.

Developing countries of Africa, Asia and Latin America will be the drivers of the world’s economic growth, the UN said, forecasting 5.6 percent growth next year. China’s economy will expand by 9.3 percent in 2011 and 8.7 percent in 2012, according to this forecast. Figures for India are 7.6 percent and 7.7 percent, respectively.

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The world economy would grind to a standstill should the 17-nation euro economy fail to overcome its sovereign-debt crisis, as risks of a double-dip recession in the U.S. and Europe loom, the United Nations said. In a worst-case scenario, where European leaders cannot...
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Thursday, 01 Dec 2011 02:30 PM
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