TWN Info Service on UN Sustainable Development (Jan17/02)
23 January 2017
Third World Network
United Nations: World economy remains trapped in period of slow growth
Published in SUNS #8384 dated 20 January 2017
Geneva, 19 Jan (Kanaga Raja) - The world economy expanded by just 2.2 per cent
in 2016, underpinned by the feeble pace of global investment, dwindling world
trade growth, flagging productivity growth and high levels of debt, the United
Nations has said.
In its World Economic Situation and Prospects 2017 (WESP) report, the UN has
forecast world gross product (WGP) to expand by 2.7 per cent in 2017 and 2.9
per cent in 2018, with this modest recovery more an indication of economic
stabilization than a signal of a robust and sustained revival of global demand.
In per capita terms, this equates to average global growth of just 1.5 per cent
per annum in 2016-2018, compared to an average of 2.1 per cent in 1998-2007.
According to the UN, the slight increase in gross domestic product (GDP) growth
projected for developed economies in 2017 is largely driven by the end of the
de-stocking cycle in the United States of America and additional policy support
At a media briefing here on 17 January, Alfredo Calcagno, Head of the
Macroeconomic and Development Policies Branch, UNCTAD Division on Globalisation
and Development Strategies, said that some improvement is being experienced in
the world economy, but without solving the main problems that have led to the
crisis and that have prolonged the exit from the crisis almost ten years now.
"We remain trapped in a slow growth situation," he said. The recovery
that is forecast for 2017 and 2018 will not be enough to recover the pre-crisis
growth rates, he added.
Asked about the possible impact of incoming US President Donald Trump's
proposed tax reforms (resulting in reduced tax rates for some sectors),
Calcagno said that the potential reduction of taxation on firms and the wealthy
would have an impact on capital movement.
One thing that has been mentioned is the repatriation of cash held by US firms
outside the country in order to avoid paying taxes on them. This could also
have an impact on the US dollar, he said.
Another consequence of the reduction in taxes would have to do with the fiscal
balance in the US, said Calcagno, adding that this, if in parallel with
increasing public investment, might generate a deficit in the short-term.
"That could bring us towards a challenge for the global economy - what
would happen with the US budget deficit going up again," he said.
According to Calcagno, the other element of tax reform that has been mentioned
in the press but has not been formally announced yet is whether this tax system
(hitting particularly imports) would mean a kind of higher protection for US
This would incorporate a huge challenge for the multilateral system and the
World Trade Organisation (WTO), he said.
According to the UN report, in 2016, the world economy expanded by just 2.2 per
cent, the slowest rate of growth since the Great Recession of 2009.
Underpinning the sluggish global economy are the feeble pace of global
investment, dwindling world trade growth, flagging productivity growth and high
levels of debt.
Low commodity prices have exacerbated these factors in many commodity-exporting
countries since mid-2014, while conflict and geopolitical tensions continue to
weigh on economic prospects in several regions.
"The global economy remains trapped in a prolonged period of slow economic
growth and dwindling international trade growth," said the report.
While some of the exceptional factors that restrained global growth in 2016 -
such as the de-stocking cycle in the United States and adjustment to the sharp
terms-of-trade shock faced by commodity-exporters - can be expected to ease,
the longer-term pressures restraining the global economy continue to prevent
more robust growth.
"The relatively slow pace of economic growth will hamper progress towards
achieving the Sustainable Development Goals (SDGs), as defined in the 2030
Agenda for Sustainable Development, which was adopted by the Member States of
the United Nations in 2015."
If downside risks to the outlook were to materialize, this could push global
growth rates down even further, with additional setbacks towards achieving the
SDGs, particularly the goals of eradicating extreme poverty and creating decent
work for all, the UN cautioned.
It noted that the factors underlying the protracted economic slowdown have a
tendency to reinforce one another, through the close linkages between demand,
investment, trade and productivity.
Economic and political uncertainties have also weighed on investment demand in
many countries, while the nexus between profits and investment has weakened in
both developed and developing countries.
The declining demand for capital goods associated with weak investment
restrains global trade, which in turn curtails investment further.
"In the absence of concerted policy efforts to revive productive
investment and foster a recovery in productivity, there is a risk that the
protracted episode of weak global growth may linger for several more
The report said that stable private consumption will remain the mainstay of growth
in the developed economies.
The slight increase in gross domestic product (GDP) growth that is forecast for
2017 is driven primarily by the end of the de-stocking cycle in the United
States and additional policy support in Japan, including an expansion of
government investment spending.
Uncertainty related to the withdrawal of the United Kingdom of Great Britain
and Northern Ireland from the European Union (EU) has led to downward revisions
to growth forecasts for the United Kingdom and several other countries in
Europe in 2017.
Meanwhile, the lack of clarity about the future direction of policy in the
United States, with potentially far- reaching spillover effects on both
domestic and global economic prospects, has increased the margin of uncertainty
around global baseline forecasts.
GDP growth in developing countries, especially in East and South Asia, is
expected to remain driven by domestic consumption.
China's expansion is expected to remain stable, supported by the strong policy
stance, but the re-balancing of the economy continues to weigh on global trade
India is expected to remain the fastest growing large developing economy, as
the country benefits from strong private consumption and the gradual
introduction of significant domestic reforms.
"Among the largest countries," the report says about trends in South
Asia, "India has positioned itself as the most dynamic emerging economy.
India's economy is projected to expand by 7.7 per cent and 7.6 per cent in 2017
and 2018, respectively, benefiting from strong private consumption. Investment
demand is expected to slightly pick up, helped by monetary easing, government
efforts towards infrastructure investments and public-private partnerships, and
the implementation of domestic reforms such as the introduction of the Goods
and Services Tax (GST) Bill."
"This reform constitutes a major change by establishing a new uniform tax
rate, and it should promote investment in the medium term through lower
transaction and logistic costs and efficiency gains. Importantly, an effective
GST implementation also requires adequate capacity building of the tax
administration. Nevertheless, low capacity utilization and stressed balance
sheets of banks and businesses will prevent a strong investment revival in the
[According to Indian media reports, the new GST regime in India will come into
effect from 1 July 2017. There appears to be no mention in the WESP report on
the recent "demonetization" of high-value currency and its immediate
likely effects on GDP growth. SUNS]
Meanwhile, growth in the least developed countries (LDCs) is expected to rise
modestly from an estimated 4.5 per cent in 2016 to 5.2 per cent and 5.5 per
cent in 2017 and 2018, respectively.
The economies in transition suffered a sharp collapse in domestic demand in the
Commonwealth of Independent States (CIS) region in 2016, while net trade made a
positive contribution to GDP growth, reflecting the impact of lower imports as
a result of steep exchange rate realignments in several countries.
In 2017, the economy of the Russian Federation is expected to register its
first year of growth since 2014, as the country has largely absorbed the sharp
terms-of-trade shock suffered in 2014-2015.
The UN however said global economic prospects remain subject to significant
downside risks, with the potential to obstruct the modest acceleration in
growth that is currently forecast for 2017-2018.
"Considerable uncertainty shrouds both the path and impact of monetary
policy actions in major developed economies."
The effects of introducing untested monetary policy instruments - such as the
negative interest rate policies in Japan and Europe - remains unclear, with a
risk of unintended consequences, such as a deterioration of bank balance sheets
and tightening of credit conditions, which could destabilize fragile and
While the path of policy interest rates in the United States remains unclear,
interest rate differentials relative to other developed economies are expected
to widen, potentially triggering financial volatility, capital outflows from
developing economies and abrupt adjustments in exchange rates.
"The future direction of certain international policy stances is
uncertain. There is a lack of clarity over the shape and timing of future
changes by the new Administration of the United States to crucial policies in
international trade, immigration, and climate change."
The UN also said the decision by the United Kingdom to leave the EU, or
"Brexit", and its potential implications for the free movement of
goods and workers in Europe, also poses considerable regional uncertainty.
Finally, risks facing developing countries include vulnerabilities associated
with high levels of debt and rising default rates in a number of countries,
with the potential to push up borrowing costs, raise de-leveraging pressures
and increase banking sector stress.
Such risks are exacerbated by the volatility of international capital flows.
"All of these uncertainties have the potential to undermine any projected
recovery in business investment, impede international trade growth and prolong
the self-propagating cycle of weak global growth," said the report.
According to the report, weak investment has been at the foundation of the
mediocre global economy, through its interplay with demand, productivity and
The contribution of investment to global growth has declined from an average of
1.4 percentage points per annum in 2003-2007 to 0.7 percentage points per annum
Both global and country-specific factors have contributed to the weakening of
investment. Protracted weak global demand has reduced firms' incentive to
invest, especially those in export-oriented industries.
Since the onset of the broad-based decline in commodity prices in late-2014,
commodity sectors in particular have suffered from delays and cancellation of
infrastructure investment and exploration activities. Global investment in
energy sectors, for example, declined by 8 per cent in 2015.
Policy uncertainty and in some cases social unrest have also held back
investment in several countries, including Brazil, South Africa, Turkey, the
United Kingdom and the United States.
A lack of access to finance has also created barriers, especially in Europe
where certain banks remain under-capitalised as well as in developing countries
that are struggling with high interest rates or where financial markets are
In developed economies, private non-residential investment growth has been
exceptionally weak in the past two years, especially when compared to the
pre-crisis years 2005-2007.
In the first half of 2016, most major developed economies experienced a
contraction in private non-residential investment activity.
The sharp contractions in Australia and Canada largely reflect large cutbacks
in mining-related capital expenditure, while the United States has seen a
significant decline in investment in the shale-oil sector.
The report said these declines have not been matched by a commensurate
expansion of investment in renewable energy, and are likely to prove temporary,
rather than signal significant structural progress towards a less fossil
"In the United States, in particular, an expansion of investment in fossil
fuel industries would be expected in 2017, should the new Administration lift
certain environmental restrictions on production in the shale, oil, natural gas
and clean coal sectors, risking setbacks to environmental targets in the SDGs
and the Paris Agreement on climate change."
Despite record-low, often negative bond yields, Governments in developed
countries have been reluctant to increase public sector investments to fill the
gap in private investment.
Steep cuts in government investment largely reflect fiscal adjustment policies
that have been implemented in many developed economies since 2010 in response
to soaring levels of government debt.
"While the policy outlook for the United States remains highly uncertain,
proposals to boost infrastructure spending would support a revival of
investment in the fiscal year starting October 2017 if implemented," the
In major developing countries and economies in transition, investment growth
has also slowed notably in recent years.
As in developed economies, a sharp decline in investment in the commodity
sector has weighed on investment growth, particularly in Brazil, the Russian
Federation and South Africa.
In the Russian Federation, the decline also reflects the impact of
international sanctions on access to capital and business sentiment.
In the case of China, weaker investment growth reflects large over-capacity in
a number of industrial sectors, including iron and steel, cement and even the
solar energy sector, as well as sluggish market demand and higher corporate
Slower investment growth in major developing economies has been largely driven
by the private sector. In line with their greater scope to exploit fiscal
space, East Asian and South Asian economies have generally seen stronger growth
in public investment, especially in infrastructure.
The slowdown in private sector investment growth in many developing economies
raises some concerns, as it suggests that the significant increases in
corporate debt burdens, particularly in East Asia, have failed to deliver a
comparable increase in productive capital stock.
"Going forward, these high debt burdens may begin to restrain access to
finance or prompt firm de-leveraging, perpetuating the slowdown in investment
growth, and may also increase the risks of debt distress and financial
instability in some developing countries."
According to the report, dwindling world trade growth is both a contributing
factor and a symptom of the global economic slowdown.
The current weak investment trends in major developed and developing economies
have constrained trade in capital goods, while at the same time, the weakness
in trade is propagating and reinforcing the slump in investment, especially in
other export-oriented sectors.
There may also be spillovers from weak global trade to productivity, especially
in developing countries, it said.
The volume of world trade in goods and services is estimated to have expanded
by just 1.2 per cent in 2016, the slowest growth rate since the financial
crisis, marking a significant downward revision of nearly 3 percentage points
compared to projections in the World Economic Situation and Prospects 2016
report, said the UN.
The estimated global trade growth of only 1.2 per cent in 2016 will stand out
as the third-lowest rate of growth in the past 30 years.
Looking ahead, said the UN, significant fragilities in the international
financial system pose major risks to developed and developing economies.
The main underlying factor is the widening divergence between buoyant - and
complacent - financial markets and persistently weak global economic growth
resulting from the over-reliance on monetary policy to stimulate economic
Years of expansionary monetary policy coupled with the lack of support on the
fiscal side encouraged excessive risk-taking and considerable distortions,
leading to very high equity and asset prices, without ensuring a robust growth
"Significant uncertainties and risks persist in the financial market,
which may suddenly alter the volume, destination, composition and pace of
international capital flows."
As global divergences in policy rates and yields continue to widen, this may
trigger disorderly adjustments in asset prices and change capital flows, with significant
adverse effects on the real economy, especially in large developing countries
with high openness to foreign capital, such as Mexico, South Africa and Turkey.
"In the first days following the election in the United States, emerging
market assets dropped noticeably, along with a sharp depreciation in several
emerging market currencies. A further surge in risk aversion - driven, for
example, by concerns related to the possible introduction of protectionist
measures by the United States or the implementation of Brexit - could
destabilize financial markets worldwide."
While the dispersion of global current-account deficits and surpluses has
narrowed somewhat from the peaks leading up to the global financial crisis, a
significant degree of imbalance still persists, posing a potential risk to
global financial stability.
The United States current-account deficit narrowed from 1.6 per cent of WGP in
2006 to 0.5 per cent in 2013, combined with a decline in China's
current-account surplus from 0.5 per cent of WGP to 0.2 per cent over the same
However, the United States current account deficit has been widening since
2014, and is expected to widen further in 2017-2018. The current account
surplus in East Asia, after widening slightly in 2014 and 2015, has narrowed
again, and a return to the level of global imbalances in 2006 is unlikely.
The report noted that the United States dollar has appreciated by more than 15
per cent since mid-2014. The strong dollar has restrained exports of the United
States, and has been an important factor underpinning the recent widening of
the current account deficit of the United States.
As interest rates in the United States are expected to rise relative to other
major developed economies in 2017- 2018, some upward pressure on the dollar is
expected to continue, further unwinding some of the improvement in the current
account deficit of the United States since 2006.
MAJOR UNCERTAINTIES AND RISKS
The report said there is considerable uncertainty related to the evolution of
international policy. For example, the new Administration in the United States
has discussed far-reaching changes to the current direction and stance in
policy related to macroeconomics, trade, immigration, foreign affairs and the
environment, as well as the nature of its participation in multilateral
organizations and institutions.
"Should some of these changes be implemented, the substantial economic
impact would mostly manifest itself beyond the forecasting period of this
report, but heightened uncertainty could weigh on investment decisions in the
short-term as well," said the UN.
This uncertainty may also trigger capital withdrawal from developing economies
with open capital markets, such as Mexico, South Africa and Turkey, in a
general "flight to safety".
Some measures recently proposed by the incoming Administration in the United
States may have the potential to accelerate GDP growth in the short-run, such
as a large expansion of infrastructure investment coupled with significant cuts
in taxation, although it is not clear whether Congress would agree to the rise
in government debt levels that such a move would entail.
"The introduction of ad hoc tariff barriers to some important trade
partners, such as China and Mexico, on the other hand, would be
counterproductive and slow economic growth, especially if such actions trigger
retaliatory measures that could potentially spread to other countries,"
the report cautioned.
It said the decision by the United Kingdom to leave the EU also raises questions
regarding international policy, which can be broadly grouped into three
different levels: uncertainties about the future trade, financial and migration
arrangements between the United Kingdom and the EU and between the United
Kingdom and other countries; the likelihood that similar actions will be taken
by other EU members; and the extent to which this signals a change in the trend
of global economic integration at large.
From a global perspective, the shifting direction of policy in the United
States and the United Kingdom partly reflects increasing discontent with the
imbalanced distribution of the burdens and gains that deepening global economic
integration has brought in the past few decades.
For example, more open international trade has indeed generated substantial
economic gains for many countries through improved efficiency in allocating
At the same time, more open trade has been associated with widening income
inequality in many countries, along with job losses and declining wages for
certain categories of workers, although these developments also reflect factors
such as technological progress.
"These concerns have enhanced the appeal of protectionism and
inward-looking policies in many countries."
More concerted international efforts to improve global governance, along with
more effective domestic re-distribution policies, are needed to ensure that the
gains from global economic integration are more inclusive, said the UN.
"In the absence of such efforts, protectionist tendencies may escalate,
which could prolong the slow growth in the world economy and lead to a
less-efficient allocation of resources and slower pace of technological
The report noted that developed economies continue to rely heavily on monetary
policy to support their macro-economic objectives.
As the scope for conventional monetary stimulus was to a large extent exhausted
when interest rates were cut to near zero levels in the aftermath of the global
financial crisis, central banks have made greater use of unconventional policy,
such as quantitative and qualitative easing, negative interest rate policies
and yield curve targeting.
Proposals have also been made to explore new tools such as "helicopter
money", which is essentially a fiscal expansion financed by a central
"The longer-term impacts of these measures, which have limited historical
precedence, remain unclear."
The UN also said the significant rise of corporate debt in emerging markets in
recent years has emerged as an important risk to the global growth outlook.
This trend has been largely driven by loose financing conditions in the
post-crisis period, facilitated by capital inflow seeking higher-yield assets.
Government debt has also risen in many developing countries, reflecting the
deterioration of fiscal positions related to slower growth, subdued commodity
prices and higher financing costs, especially in countries that have suffered
sharp currency depreciations.
According to the report, other risks and uncertainties in the world economic
prospects include banking sector fragilities, especially in Europe, but also in
some developing and transition economies, which could trigger financial
distress in response to a further squeeze on bank lending margins or rising
defaults related to exchange rate shocks; the response to recovery in commodity
prices, which could lead to a stronger pass-through to inflation than currently
forecast; as well as the political, geopolitical and security risks which
continue to weigh on regional prospects in many parts of the world.