International

World economy to struggle in 2012, U.N. warns

FILE - NEW YORK A woman exits a store on the busy shopping street of Broadway on December 13, 2011 in New York City. (Spencer Platt/Getty Images/AFP)

GENEVA: The global economy will grow by only 0.5 percent in 2012, effectively shrinking on a per capital basis, unless there is rapid action to create jobs, prevent sovereign debt distress and shore up fragile banks, a United Nations study said Tuesday.

The annual U.N. World Economic Situation and Prospects report forecast average economic growth of 2.6 percent in 2012 and 3.2 percent in 2013, assuming what it said were benign conditions in a “make-or-break year” for economic recovery.

The assumptions included a 50 percent cut in Greek sovereign debt, a minor American economic stimulus in the short term and a realization of economic policy commitments taken by the G-20 group of nations at Cannes in November.

The report said these would at least allow developed economies to “muddle through” but there was a high risk that these assumptions would be overly optimistic.

“The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand [associated with high unemployment and fiscal austerity measures] and policy paralysis caused by political gridlock and institutional difficulties,” the report said.

“All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn,” it noted.

In the downside scenario, economic growth of only 0.5 percent would not keep pace with population growth, resulting in a downturn in average per capita income for the world.

In the downside scenario, the European Union economy would contract by 1.6 percent in 2012, with Germany, France and Britain all sliding back into a recession.

But the biggest loser from the downside scenario would be Russia, with a baseline forecast of 3.9 percent GDP growth in 2012 flipping to a 3.6 percent contraction, especially if oil prices were to fall just as the presidential election spurs new social and public spending.

 
A version of this article appeared in the print edition of The Daily Star on January 18, 2012, on page 5.

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