Output growth for six developed nations: Japan, U.S., France, Germany, Italy, and U.K, 2003-2011. After a rapid post-crisis recovery, the world economy is slowing down from around 4 per cent GDP growth in 2010 to about 3 per cent in 2011. Units are annual percentage change. Data from UNCTAD

After a rapid post-crisis recovery, the world economy is slowing down from around 4 per cent GDP growth in 2010 to about 3 per cent in 2011 (see table). Developing economies will continue to record higher growth, at above 6 per cent, compared with developed economies, which registered a mere 1.5 per cent to 2 per cent growth in 2011. Transition economies should continue recovering from the steep fall of 2009, with expansion estimated at 4 per cent. The two-speed recovery is mainly due to wide differences in domestic demand:

  • In developing countries, strong wage growth and sustained public support helped to recover investment and domestic demand well beyond the impact of countercyclical fiscal packages.
  • In most developed countries, private demand remains subdued, owing to a number of factors:
    • High unemployment
    • Stagnating wages
    • High household indebtedness and the ongoing deleveraging process
    • Reluctance of banks to provide new finance
    • Shift in fiscal policies for stimulus to retrenchment

Growth in developing countries has been strongly based on the expansion of domestic demand. However, developing countries still face significant external risks because of the economic weakness in developed economies. The lack of substantial reforms in international financial markets is an additional risk factor. Renewed risks of financial turmoil and economic recession should encourage more effective international cooperation to achieve global rebalancing and sustained growth. After the eruption of the global financial and economic crisis, there was an initial successful international response in 2008-2009. However, international economic cooperation, mainly in the context of the Group of Twenty, or G-20, has made little progress in areas such as financial regulation and global macroeconomic coordination. Global imbalances increased again in 2010 and 2011. As a result, developing countries remain vulnerable to trade and financial shocks. These may strongly affect the volume of their exports and commodity prices, as in 2008. They must also face financial instability and speculative capital flows generated in developed economies and would not be spared from a new recession in developed countries. […]

Strong downside risks for a two-speed recovery that is losing steam in developed economies