World Economic Situation and Prospects 2012: Mid-year Update

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The United Nations Department of Economic and Social Affairs (DESA) recently released a report through their Development Policy and Analysis Division (DPAD). The report is titled ‘World Economic Situation and Prospects (WESP) 2012 mid-year update’ and focuses on the current global economic situation.

According to the WESP, there have been some signs of improvement for the world global economy in recent months, however, the overall situation is still challenging. There are four major weaknesses identified which will hinder economic recovery:

  1. Deleveraging by banks, firms and households, which continues to restrain normal credit flows.
  2. Continuing high unemployment rates
  3. Fiscal austerity responses to rising public debts deter economic growth and make a return to debt sustainability all the more difficult.
  4. Bank exposures to sovereign debt perpetuate fragility in the financial sector, which in turn spurs continued deleveraging.

Due to these four weaknesses, the report warns that economic growth in 2012 will remain slow, with the debt crisis in the euro zone remaining the biggest threat to the world economy. Even if the debt crisis can be slowed, the WESP suggests that economic activity in the European Union will stagnate.

Policy Recommendations

The WESP states that to break out of the vicious cycle, more coherent efforts need to be made on several fronts of national and international policy making:

  1. Countries need to shift away from self-defeating fiscal austerity and towards a renewed stimulus.
  2. Fiscal policies need to be redirected to support job creation and green growth more directly.
  3. Better coordinated policies and accelerated financial sector reform needs to occur to increase the stability of the global monetary and financial system.
  4. Policymakers need to ensure that developing countries have access to sufficient resources to accelerate progress towards the achievement of the Millennium Development Goals and for investments in sustainable and resilient growth.

While not everyone will welcome such suggestions, it is clear that the current fiscal austerity is not working as it has helped push many European countries further in recession. The current efforts are backfiring and policymakers need to try a different approach to avoid a bigger, global crisis.

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