UN economic thinktank signals deflationary danger

14th September 2010, Comments 0 comments

UN economists warned Tuesday that a swift exit from economic stimulus measures in wealthy nations could trigger a deflationary spiral akin to the one that depressed the Japanese economy in the 1990s.

"This is one of major problems that we have in the world economy at the this moment in time, we have a dramatic deflationary danger," said Heiner Flassbeck, a senior economist at the UN Conference on Trade and Development.

UNCTAD's annual Trade and Development report, which was released on Tuesday, forecast that the global economy would expand by an average of 3.5 percent this year, before contracting again in 2011.

It cautioned that a "premature exit" from state intervention to stimulate demand could stall the "fragile" economic recovery.

"A continuation of the expansionary fiscal stance is necessary to prevent a deflationary spiral and a further worsening of the employment situation," the 2010 report compiled by Flassbeck's team said.

"It is becoming clear that not all countries can rely on exports to boost growth and employment; more than ever they need to give greater attention to strengthening domestic demand," it added.

The report predicted that growth would decline next year as stimulus measures petered out and lingering systemic shortcomings such as global current account imbalances remained unchecked.

Flassbeck estimated that growth could subside to an average of 2.0 to 2.5 percent globally in 2011.

The UN thinktank urged the G20 group of wealthy and emerging nations to maintain their crisis-driven attempt to coordinate economic policy, amid signs that the approach to the recovery on either side of the Atlantic and in China differed significantly.

Flassbeck noted that the United States was pursuing an "aggressive" monetary policy.

"We have exactly the same danger that occurred to Japan after the bursting of the bubble at the beginning of the 1990s, (it) is now threatening the US economy, because the disposable income of private households in the United States is falling for the first time since 1950," he told journalists.

Neither the United States, nor China, the euro area or Japan were in a position to serve as an engine of growth for the world economy, as major post-crisis adjustment reduced their weight, the report argued.

Households were forced to cut debt and their spending in the United States, while China was trying to move from export-led to domestic consumer-led growth, while European nations have opted for austerity.

UNCTAD called on developing nations to rethink their approach by stimulating domestic demand and balancing their traditional reliance on volatile exports such as commodities.

© 2010 AFP

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