UN expects global economy to gain momentum slowly

After a marked downturn over the past two years, the global economy is expected to gain momentum slowly for the rest of 2013 and 2014 on the back of accommodative monetary policies in developed and developing economies, a latest UN report said here Thursday.

While addressing the launch of the mid-year report featuring World Economic Situation and Prospects 2013 (WESP), UN Assistant Secretary-General for Economic Development Shamshad Akhtar said the lingering global slowdown has been replaced by "measurable improvements," such as United States gaining momentum in growth and Japan growing by 3.5 percent in the first quarter of 2013.

According to the new report, released by the UN Department of Economic and Social Affairs (DESA), the growth of world gross product (WGP) is now projected at 2.3 percent in 2013, the same pace as in 2012, and will gradually strengthen to 3.1 percent in 2014.

The global growth has been revised slightly downward from the forecasts presented in the last WESP report, which was published in December, stating the global economy was expected to grow by 2. 4 percent this year and 3.2 percent next year.

"Despite improved global financial conditions and reduced short- term risks, the world economy continues to expand at a subdued pace," the new report said. "Most world regions are likely to see a moderate pick-up in activity, but growth will continue to be below potential and employment gains, especially 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.

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 once again derail the feeble recovery of the world economy.

The update report showed ongoing weaknesses in developed economies, which continue to face major risks and uncertainties. In the euro area, the risk of a near-term break-up has declined considerably, but the economic situation remains "dire." The real economy is held back by austerity programs, weak bank lending and continued uncertainty, with activity projected to contract by 0.4 percent in 2013.

In the United States, the avoidance of the fiscal cliff and expansion of monetary easing, along with gradual recovery in the housing sector, have somewhat improved growth prospects. Automatic government spending cuts and uncertainties associated with budget issues will weigh on aggregate demand. Economic growth is forecast to slow to 1.9 percent in 2013, before picking up to 2.6 percent in 2014.

In Japan, policymakers have taken bold expansionary measures in an attempt to resuscitate the economy from the grip of deflation, but the results of these policies remain "uncertain." Gross domestic product (GDP) growth is projected at 1.3 percent in 2013 and 1.6 percent in 2014.

In addition, many large developing countries, including Brazil, China, India and Russia, saw a significant deceleration in GDP growth in the past two years.

"The deceleration in the BRIC countries is largely due to a combination of weak external conditions and domestic impediments," said Ingo Pitterle, the UN's leader for the report.

Although the report predicted GDP growth in China to be 7.8 percent in 2013 and 7.7 percent in 2014, an unexpected drop in China's growth to about 5 percent would impact economic activity worldwide, especially in commodity-exporting developing countries.

The report added that job creation will be vital to spur recovery while warning that unemployment in the euro area has reached an all-time high and is forecast to average 12.8 percent in 2014.

"The employment situation remains a key policy challenge in a large number of economies, as the world economy continues to expand below its potential," said Pingfan Hong, Chief of the Global Economic Monitoring Unit for the UN Department of Economic and Social Affairs.

The US unemployment rate has fallen, but remains high by historical standards, and the drop partly reflects a significant decline in labor force participation. Some further improvement is expected in the outlook period, with US unemployment forecast to average 7 percent in 2014.

In most developing regions, labor markets have not suffered as extensively from weak demand. In parts of East Asia and South America, unemployment rates have dropped below the levels seen before the financial crisis. By contrast, employment continues to be a key problem in many African countries, despite relatively strong growth in recent years.

"The main priority for policymakers worldwide should be to support a robust and balanced global recovery, with a focus on promoting job creation," Akhtar noted.