World Economy

Global Growth Below Forecast

Global Growth Below ForecastGlobal Growth Below Forecast

The world economy has fallen below forecasts of even six months ago and will grow only modestly over the next two years due to "cyclical and structural headwinds," including low commodity prices and stagnant investment, the United Nations reported, urging steps to ensure stronger growth.

"Stronger and more coordinated policy efforts are needed to ensure robust, inclusive and sustainable economic growth, which will be a key determinant for achieving the 2030 Sustainable Development Goals," UN Assistant Secretary-General of the UN Department of Economic and Social Affairs, Lenni Montiel said of the ambitious sustainability goals adopted at a UN summit in September.

Global growth is estimated at a mere 2.4% in 2015, a downward 0.4 percentage-point revision from forecasts presented six months ago, according to the UN World Economic Situation and Prospects 2016 report launched Thursday.

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 2008-2009, it noted.

Growth Shifting

Given the anticipated slowdown in China and persistently weak economic performances in other large emerging economies, notably the Russia and Brazil, the pivot of global growth is partially shifting again towards developed economies.

The global economy is projected to grow by 2.9% in 2016 and 3.2% in 2017, supported by generally less restrictive fiscal and still accommodative monetary policy stances worldwide, according to the report.

"The expected timing and pace of normalization of the United States monetary policy will help reduce some policy uncertainties and provide impetus to revive investment," Hamid Rashid, Chief of the UN's Global Economic Monitoring Unit said in presenting the report.

But preventing excessive volatility and ensuring an orderly adjustment in asset prices also depends on commodity price stabilization and no further escalation in geo-political conflicts, the report noted.

Five Major Headwinds

Identifying five major headwinds, it cited persistent macroeconomic uncertainties; low commodity prices and diminished trade flows; rising volatility in exchange rates and capital flows; stagnant investment and productivity growth; and a continued disconnect between finance and real sector activities.

Weak growth is also adversely impacting labor markets in developing and transition economies, with unemployment on the rise, especially in South America, or stubbornly high, as in South Africa. At the same time, job insecurity is often becoming more entrenched amid a shift from salaried work to self-employment.

With persistent output gaps, modest wage growth and lower commodity prices, global inflation is at its lowest level since 2009. Deflation risks in developed economies have diminished, but not disappeared, particularly in Japan and the eurozone.

Growth in developed economies will gain some momentum in 2016, surpassing the 2% mark for the first time since 2010, the report notes. 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.

A Delicate Balance

Monetary authorities need to make concerted efforts to reduce uncertainty and financial volatility, striking a delicate balance between economic growth and financial stability objectives, it stresses.

Given the massive build-up of private debt in many emerging economies, policymakers need to fine-tune their policy mix–more active fiscal policies, macro-prudential instruments, targeted labor market policies, among others–amid volatile global financial conditions.

The report highlights that monetary policies did most of the heavy-lifting since the global crisis to support growth but the time has come for fiscal policies to play a greater role. Well-designed and targeted labor market strategies are needed to complement fiscal policies to re-invigorate productivity, employment generation and output growth.