The United Nations has released the World Economic Situation and Prospects 2019 report that primarily highlights the prospects for global macro-economic development as well as the uncertainties, risks and implementation of the 2030 Agenda for Sustainable Development. In this context, the build-up of short-term risks that can potentially disrupt economic activity and long-term development, will also make it harder to achieve the Sustainable Development Goals.
Vulnerable countries, with large macro-economic imbalances and high levels of external debt are particularly susceptible to such disruptions. The narrowing policy spaces across the world entails that external economic shocks can severely impact long-term global growth and have long-lasting implications for socio-economic conditions. Thus, increasing downside risks and vulnerabilities threaten the short-term sustainability of economic growth.
2018 saw a significant escalation in trade tensions across the world’s largest economies with increasing disputes being raised under WTO’s settlement mechanism. The momentum of global trade growth has softened, as direct subsidies and stimulus measures have offset the negative impacts on China and the US. However, heightened tensions and additional tariff impositions has put the global trade outlook and economy under considerable risk.
These could lead to investment slowdowns, higher consumer prices, decline in business confidence and severe disruptions to global value chains. This will specifically hold true for East Asian economies, wherein the exporters are deeply embedded in the trade supply chains between the US and China. The higher consumer prices could lead to reduced demand for commodities, thereby impacting commodity-exporters from Latin America and Africa.
Emerging economies and specific industries are vulnerable to aggravated financial uncertainties and debt distress, given the squeeze in profits, possibly caused by rising prices of imports, high debt-servicing costs etc. Subdued trade growth for a protracted time period will weigh down productivity growth and long-term prospects as trade channels are interlinked with investments. Productivity growth is supported by trade via economies of scale, access to inputs, acquisition of knowledge and technology etc. Trade in services contributes to inclusiveness, resilience and diversification.
Abrupt tightening of global financial conditions can spark localised financial turmoil. 2018 witnessed heightened bouts of market volatilities caused by rising policy uncertainties and deepening country-specific vulnerabilities. The escalating trade tensions, debts and geopolitical risks as well as oil market developments and shifting expectations over the American monetary policy impacted investor sentiments. Given this uncertainty, any sudden developments or shifts in sentiment could trigger sharp market corrections and disorderly capital reallocations. Rapidly rising interest rates and strengthening of the dollar could deepen domestic financial troubles for some countries, thus increasing risks of debt distress.
This market contagion could potentially become more widespread as investors become wary of vulnerable countries with high current account and fiscal deficits, large external financing needs, lack of transparency in debt obligations or limited policy buffers. Discrete shifts in investor confidence places emerging markets under great risks, regardless of underlying fundamentals. Financial stress can spread amongst countries through banking channels and other financial market linkages.
Monetary policy adjustments in developed economies like the US based on increased interest rates and import tariffs, or, policy easing in China, in response to inflationary pressures, could trigger sharp tightening of global liquidity conditions, with repercussions on real economic activity, global/regional spillovers and financial imbalances. If European policymakers fail to finalise legal and regulatory arrangements around BREXIT, global financial stability is at further risks, given the prominence of European banks in driving global cross-border financial flows.
Intensifying climate risks and potential shocks are threatening the economic prospects of developed and developing countries and severely damage crucial infrastructure, as large communities are susceptible to displacement. The human costs of disasters are borne overwhelmingly by low-income and lower-middle-income countries. The small developing island countries (SIDS) are particularly vulnerable to climate change risks, especially marine inundation of coastal infrastructure, if global warming reaches 1.5°C. Related damage to critical transport infrastructure (ports, airports) can impact international trade as well as sustainable development prospects.
The underlying long-term vulnerability of global economic growth endangers the financial, social and environmental sustainability of countries. Rising private and public debts and service obligations already constitute a heavy burden on government finances. In case of developing economies, this has not been matched by equivalent expansions of productive assets, given large infrastructure gaps, degradation of existing capital and hampered productivity.
Global social development is severely impeded in regions with high levels of poverty and inequality and weak per-capita income growth. To eradicate poverty by 2030, double-digit economic growth is required in Africa, alongside dramatic reductions in income inequality and poverty rates.
Importantly, fundamental and rapid shifts are imperative, in the way in which global economic growth is powered. This implies a decline in CO2 emissions well before 2030. The current reductions in the greenhouse gas intensity of production and the transition towards environmentally sustainable production/consumption is not sufficient, as carbon emissions continue to rise and accelerate climate change. Only an urgent focus on this can avert further damage to the ecosystems and livelihoods of the global population.
Thus, fundamental transformations, supported by myriad policy actions and accelerated by technological innovations, alongside massive changes in behaviours and attitudes.
India Outbound
January 24, 2019
source https://indiaoutbound.org/economic-and-sustainability-outlook-for-2019/
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