UN economists have warned that a quick exit from economic stimulus measures in wealthy nations could trigger a deflationary spiral like 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 today, forecast that the global economy would expand by an average of 3.5% this year, before slowing in 2011. It warned 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.
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% to 2.5% globally in 2011.
The UN think-tank urged the G20 group of wealthy and emerging nations to maintain their crisis-driven attempt to co-ordinate economic policy. Neither the US, 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.
