World Economic Situation and Prospects as of mid-2012

Despite scattered signs of improvement, the world economic situation and prospects continue to present challenges. After a marked slowdown in 2011, global economic growth will likely remain tepid in 2012, with most regions expanding at a pace that is below potential. In the face of subdued growth, the jobs crisis continues, with global unemployment still above its pre-crisis level and unemployment in the euro area rising rapidly. The risks to the global outlook are tilted to the downside. The euro area debt crisis remains the biggest threat to the world economy. An escalation of the crisis would likely be associated with severe turmoil on financial markets and a sharp rise in global risk aversion, leading to a contraction of economic activity in developed countries, which would spill over to developing countries and economies in transition. A further sharp rise in global energy prices might also stifle global growth. Concerted national and international policies should be enacted on multiple fronts in order for the world economy to break out of the vicious cycle of deleveraging, rising unemployment, fiscal austerity and financial sector fragility in developed economies. Breaking this cycle requires policy shifts away from fiscal austerity and towards more countercyclical fiscal stances oriented to job creation, which are better coordinated across the major economies and concerted with continued expansionary monetary policies in developed countries, accelerated financial sector reforms and enhanced development assistance for low-income countries.