The report said that investment demand is expected to respond to a more accommodative monetary policy stance and slightly improved business confidence.

India’s economy, which represents almost three quarters of the South Asia region’s GDP, slowed markedly in the past two years. Annual growth declined from more than 9% in 2010 to 5.5% in 2012, the slowest pace in 10 years.

The slowdown reflected weaker consumption and investment demand as a result of persistent inflation, high nominal interest rates, large fiscal deficits and political gridlock, the report said. These factors will likely continue to impact economic growth in the next two years even as a moderate recovery is expected.

Economic growth in South Asia during 2012 fell to its slowest pace in a decade, but is projected to recover in 2013.

After growing by 5.8% in 2011, the WESP reports that South Asia’s gross domestic product expanded by only 4.4% in 2012. Going forward, economic growth in the region is projected to accelerate to 5.0% in 2013 and 5.7% in 2014, led by a gradual recovery in India.

The report said persistent high inflation, political uncertainties, and transport and energy constraints weighed on household consumption and business investment in 2012. At the same time, the exports of most countries in the region were hit by the slowdown in developed and emerging economies.

Growth of the world economy has weakened considerably during 2012 and is expected to remain subdued in the coming two years. The global economy is expected to grow at 2.4% in 2013 and 3.2% in 2014 a significant downgrade from the UN’s forecast of half a year ago. This pace of growth will be far from sufficient to overcome the continued jobs crisis that many countries are still facing. With existing policies and growth trends, it may take at least another five years for Europe and the United States to make up for the job losses caused by the Great Recession of 2008-2009.

Weaknesses in the major developed economies are at the root of the global economic slowdown.The WESP report stresses that most of them, but particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth. Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12% this year. Also, the US economy slowed significantly during 2012 and growth is expected to remain meager at 1.7% in 2013. Deflationary conditions continue to prevail in Japan.

The economic woes in Europe, Japan and the United States are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices. The larger developing economies also face home-grown problems, however, with some (including China) facing much weakened investment demand because of financing constraints in some sectors of the economy and excess production capacity elsewhere. Most low-income countries have held up relatively well so far, but are now also facing intensified adverse spillover effects from the slowdown in both developed and major middle-income countries.

The prospects for the next two years continue to be challenging, fraught with major uncertainties and risks slanted towards the downside. Rob Vos, the UN’s team leader for the report, warned: “A worsening of the euro area crisis, the ‘fiscal cliff’ in the United States and a hard landing in China could cause a new global recession. Each of these risks could cause global output losses of between 1% and 3%.”