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Prospects Weekly: Slow job growth projected to lag recovery, business activity constrained by capital flows decline

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Global unemployment surged by an estimated 33.8 million people since 2007, with the largest toll of 20.1 million beingtaken by the subset of developing countries for which statistics are available (26% of the total developing world labor force). Job growth is projected to lag the recovery, underscoring the importance of expanded income support programs to minimize negative welfare impacts on the poor. Although some countries are reporting a rise in capacity utilization rates, spare capacity remains high across the globe and will weigh on job creation and investment growth. Although inflows to sovereigns have returned to pre-crisis levels, gross capital inflows to firms in developing countries remain significantly compressed—highlighting continued difficult credit conditions for firms.

Slow employment growth suggests a tepid rebound in consumer spending. Global joblessness surged during 2009 from 2008 by an estimated 26.2 million people, raising the global unemployment rate to the highest on record of 6.6% of the labor force, with a median rate of 8.2% for the subset of developing countries that report data (representing 26% of the total developing world labor force). Europe and Central Asia and Latin America and Caribbean posted the largest jumps in jobless rates. Unemployment is projected to be peaking in many countries, but job creation is rising only slowly, as firms hold-off on hiring as long as possible in a lackluster economy characterized by high spare capacity and difficult credit conditions.

Differentiation in recovery across countries is evident in the shifts in capacity utilization rates. Although many countries are reporting a firming in utilization rates with the recovery in output, spare capacity remains ample and above long-term trend rates in most countries—with the slack in high-income countries sharply exceeding the slack in developing countries. Utilization rates in the U.S. reached 72.7% in February 2010, up from a post-crisis low of 68.3% in June 2009—but remain 7.9 percentage points below the 1972-2009 average. In contrast, in many Eastern European- and European Union countries, e.g., Bulgaria, Latvia, Lithuania, Greece, U.K., and Spain, utilization rates have fallen since early-2009. A projected moderation in the pace of growth of industrial production in the coming months is likely to be mirrored in slower gains or even losses in capacity utilization rates. 

Corporations have borne the brunt of the decline in capital flows to developing countries—constraining business activity. Although gross capital flows to sovereigns (predominantly in the form of bonds) have recovered significantly and even exceeded pre-crisis flows since November 2009, flows to private and public corporations remain sharply compressed. This largely reflects the collapse in syndicated bank-lending, as the lion’s share of banking flows go to corporations. While a rebound in equity flows, and more recently in bond flows, has provided some support to corporate financing, the level has not been sufficient to fully offset the fall-off in bank-lending. 

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