UN economic report
THERE is more gloomy news for the world economy which is in a slowdown mode. After IMF and the World Bank, the United Nations has come out with a report which says that global growth was a mere 2.4 per cent in 2015, down 0.4 percentage points from forecast made by the world body six months ago. The report entitled ' World Economic Situation and Prospects 2016' says that 2015 was a difficult year, while 2016 will witness only modest improvement in view of the persistence of a number of cyclical and structural problems. The world economy is projected to grow by 2.9pc in 2016, but 2017 is expected to be better with 3.2pc growth, supported by generally less restrictive fiscal and accommodative monetary policy stances worldwide.
A summary of the report has been released by the United Nations Department of Economic and Social Affairs which says that amid lower commodity prices, large capital outflows and increased financial market volatility, growth in developing and transition economies has slowed to its weakest pace since the global financial crisis of 2008-09. According to the report, growth in developed economies will gain some momentum in 2016, surpassing the 2pc mark for the first time since 2010. Economic growth in developing and transition economies is expected to bottom out and gradually recover, but the external environment will continue to be challenging and growth will remain well below its potential.
As per the report, the global economy faces five major risks: continuing macroeconomic uncertainties; low commodity prices and diminished trade flows; rising volatility in exchange rates and capital flows; stagnant investment and productivity growth; and rising disconnect between finance and real sector activities. The weakness in growth is also adversely impacting labour markets in many developing and transition economies. The report indicates that the challenges for policymakers around the globe are likely to intensify in the short run in view of the weaknesses in the world economy. Developing economies in general would need to find new sources of growth domestically or regionally to escape the potential downward spiral emanating from shocks relating to commodity prices and the exchange rate.
This would require governments to undertake comprehensive structural transformation and industrial policies that would mobilise domestic savings and investment, improve institutions and corporate governance and reduce transaction costs and increase competitiveness. Also important is the need for sustained improvement in labour productivity which would allow developing countries to create more jobs, increase the workers' share of income and reduce income inequality both within and between countries.
It is pertinent to note here that more than seven years after the great financial crisis that shook the western economies, the world is still struggling to restore the pace of balanced global growth. In developed countries, most of the burden of promoting growth has fallen on central banks, which have used a wide range of conventional and unconventional policy tools, including various largescale quantitative easing programmes, forward guidance and negative nominal interest rates. As for the emerging economies, policymakers would need to finetune their policy mix to meet the challenge of volatile global financial conditions. The report recommends that instead of monetary instruments, fiscal policies should play a greater role in lifting the global economy. At the same time, progressive labour market strategies should be adopted to complement fiscal policies to re-invigorate productivity, employment generation and output growth. The challenges ahead are formidable indeed.