Every major region ‘faces economic slowdown’

2 Aug 12
Worldwide growth will remain below 2011 levels this year and next as every major region faces a slowdown, a UK economic think-tank said today.

By Nick Mann | 3 August 2012

Worldwide growth will remain below 2011 levels this year and next as every major region faces a slowdown, a UK economic think-tank said today.

In its latest Global economic forecast, the National Institute of Economic and Social Research forecast world economic growth to slow from the 3.9% recorded last year to 3.3% this year before improving to 3.7% in 2013.

Unlike in 2009/10, emerging markets such as China and India will be unable to support world demand as they face ‘familiar’ problems affecting banking systems and, in India’s case, falling business investment. The slowdown in growth will also mean unemployment increases further and inflation remains moderate, the NIESR said.

In the ‘epicentre’ of the debt crisis, Europe, the eurozone economy is expected to shrink by 0.4% this year before growing by 0.5% in 2013. This compares to 1.5% growth recorded in 2011.

‘The recession in Europe is expected to persist into the second half of this year, with output in countries suffering from the most severe overhangs of current account deficits (Greece, Spain, Portugal) expected to continue to contract sharply next year and even into 2014,’ the NIESR said. It contrasted this with Germany, where 1.7% growth is expected next year.

Given the eurozone countries’ strong political commitment to the single currency, the NIESR expects the euro to survive but warned that the risks to the bloc are rising as politicians are slow to move towards full fiscal, financial and political union.

‘The longer this is delayed, the more countries will become embroiled in the vicious cycle between recession, deteriorating bank assets, rising sovereign risk and interest rates and imposed austerity,’ it said.

The US economy is expected to grow by 2% this year and 2.1% next year. But the ‘fiscal cliff' of spending cuts, automatically scheduled to come into effect in January 2013 unless political agreement on new plans is reached, could send the country into recession.

‘The stakes are needlessly being raised by another round of political chicken in the US,’ the NIESR said. ‘Like everyone else we expect an adjustment to the existing legislation to prevent a fiscal tightening of close to 4% of GDP. If we are wrong, the US is likely to face another recession.’

Although Japan has been a ‘rare bright spot’ in the world economy this year, with 2.3% growth forecast, it faces risks from the Chinese economic slowdown, weaker growth in the US and the sovereign debt crisis.

Its high public debt to gross domestic product ratio also poses a ‘remarkable long-term challenge’, but its debt situation is unlike that faced by countries in Southern Europe, the economists said.

‘Japan is a net foreign creditor, so all of the debt of the Japanese state is owned by domestic investors or covered by holdings of foreign assets,’ it explained. ‘This is a very different scenario from that in Southern Europe, whose countries are net debtors and therefore much of their debt is held overseas.’

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