UN forecast adds to economic gloom

Confirming the most pessimistic fears of the global economic outlook, a United Nations report estimates that the world economy could grow by a mere 1.0 per cent in 2009, a sharp deceleration from the 2.5 per cent growth for 2008, and well below the figures for previous years.

Even more alarmingly, the World Economic Situation and Prospects 2009 report released on Friday said the global economy was now deteriorating at such a pace that its main projections were already out of date. Rather than one per cent, the more depressing scenario of zero growth, or even a global decline of 0.4 per cent, now seemed more realistic, it said. This would be the first year since the Great Depression of the 1930s that the economy would actually decline.

Meanwhile, deflation worries were made worse by US producer price figures released yesterday. The cost of goods leaving factories fell for a fifth month in a row, dropping by 1.9 per cent (1.5 per cent down from the same period last year). US inflation for consumer prices is also widely tipped to turn negative in further official figures expected today.

So-called 'core' US inflation, which excludes food and energy costs, remains far higher than headline inflation. Core producer price inflation in December climbed to an annual 4.3 per cent rate in yesterday's figures.

Even with interest rates across the West heading for zero, the International Monetary Fund predicts global growth this year at just 2.2 per cent, down from an estimated 3.7 per cent in 2008, and other major institutions have similarly low expectations.

According to the UN report, if the global credit squeeze is prolonged and confidence in the financial sector is not restored quickly, the developed countries would see their combined gross domestic product (GDP) falling by 1.5 per cent. Economic growth in developing countries could also slow to 2.7 per cent, damaging their ability to reduce poverty and maintain social and political stability.

The report, jointly prepared by the UN Department of Economic and Social Affairs, the UN Conference on Trade and Development (UNCTAD) and five regional commissions, calls for massive, internationally coordinated fiscal stimulus packages that are "coherent and mutually reinforcing" and aligned with sustainable development goals. These should be in addition to the liquidity and recapitalization measures already undertaken by many countries.

Heiner Flassbeck, director of globalisation and development strategies at UNCTAD, told reporters: "There is nothing at the moment where we can say 'this is positive' or 'this is giving a positive stimulus' … for the world as a whole, the outcome could be zero, or even slightly below zero [growth]. I do not say this will go on for ever, but the coming months will get extremely tough."

Flassbeck said that the greatest threat now came from deflation of the sort suffered during the Great Depression, when falls in wages of 10 to 15 per cent in some economies triggered a drastic slump in consumer demand and brought world growth to a virtual standstill.

On a more positive note, a group of the world's top 10 bankers had said in Basel last Monday that the global economy would recover significantly in 2010 as official steps to boost growth take effect.

Summing up the talks at the Bank for International Settlements, European Central Bank president Jean-Claude Trichet, who also chairs the Group of 10 central bankers from leading economies, said lower oil prices, extra government spending and central bank steps would have a positive impact. "This is one of the reasons why we globally have the sentiment that 2010 is the year of the pick-up, a significant pick-up," he said.

China key to economic recovery
The United Nations is counting on China as Asia's "locomotive" for global economic growth. China will achieve between 7 and 8.9 per cent growth this year, with the most likely figure being 8.4. It contributed about 22 per cent to the world's economic growth last year, and the figure is set to grow this year, the UN report said.

Commenting on the report to China Daily, Wang Tongsan, an economist with the Chinese Academy of Social Sciences, said: "It is beyond doubt that China will play a more important role in the world economy as the US and Japan experience setbacks." The US economy is expected to slide one per cent this year, while Japan's is forecast to drop by about 0.3 per cent, he said.

The UN report also forecasts a continuing deceleration of economic activity in East Asia, with regional GDP growth expected to drop to six per cent this year, down from 6.9 per cent last year and 9 per cent in 2007.

Weakened trade with Europe and the United States will curtail growth in most economies in Asia, including China. However, with $1.95 trillion in foreign exchange reserves and a balanced government budget, the report said that China still has room to adopt more expansionary fiscal policies.

China has already announced a $586 billion stimulus package (equivalent to 15 per cent of the country's GDP) to boost its growth. Premier Wen Jiabao told the media recently that further government spending is planned.

China's central bank head Zhou Xiaochuan said the world's fourth-largest economy was slowing moderately, but the bank was still basing its economic policies on the assumption of 8 per cent GDP growth this year.

"It's a moderate slowdown. Certainly we will keep a very good vigilance to prevent a sharp slowdown but up to now I think we can see in comparison with many other countries it is a moderate slowdown," he told reporters at the Basel meetings.

India: Optimistic projections
India expects its economy to grow at 7-7.5 per cent in the current fiscal year after growing at about nine per cent for the last three years, as it grapples with the impact of the global credit crisis which has hit several key sectors, such as automobiles, real estate, textile and exports.

"With the presence of strong domestic demand stimulus, India is expected to maintain a strong pace of economic growth despite the global recession," said department of economic affairs secretary Ashok Chawla. Speaking at the third India-China financial dialogue in New Delhi, he added that the pace of growth in the 2009-10 fiscal year would depend on how long the global recession lasts and how quickly capital flows return to normal.

"Expanding investment in infrastructure by both the private and public sector could act as an effective counter-cyclical device to stimulate demand and to create conditions conducive for faster growth," he said.

Under the G-20 initiative, India and China along with other like-minded countries would have to work together to ensure that reforms usher in tangible results for developing countries.

The government and the central bank have taken a series of steps including sharp duty and rate cuts to contain the impact of the global financial crisis and protect growth.

Russia: Troubled rouble
The Russian rouble has sunk to unprecedented lows against the dollar and euro as a growing threat of recession forced Moscow to further devalue the currency. The Russian central bank yesterday widened the rouble's permitted trading band for the fourth time in recent months.

As a result, the currency fell to its lowest levels against the dollar since Russia opened up its economy in the Nineties, allowing the dollar to climb to 32.35 roubles. The euro also hit a record high of 42.55 roubles. The move came with the once-booming Russian economy sliding as demand for its oil and gas slumps.

Japan downgrades economic outlook
Japan's economy "is worsening and is likely to face tougher conditions" as exports weaken because of the global economic downturn, according to Bank of Japan (BoJ) governor Masaaki Shirakawa. "The global financial markets remain, on the whole, under heavy strain," he told a meeting of branch managers.

Domestic investment, consumer demand and production are all weakening, Shirakawa said, according to an official summary of his speech. The central bank downgraded its economic assessments for all of Japan's nine regions after a one-day meeting of its 32 branch managers.

"Exports decreased substantially due to the further slowdown in overseas economies and the appreciation of the yen," the bank said in a report. "Corporate profits continued to decrease, and business sentiment deteriorated. Private consumption weakened as the employment and income situation became increasingly severe. Production decreased substantially."

The bank last month slashed interest rates to near zero to tackle the deepening recession in Asia's largest economy. The BoJ is reportedly considering spending two trillion yen ($22 billion) to buy commercial paper, a type of corporate debt, as it seeks new ways to ease a credit crunch.

The Nikkei business daily reported yesterday that the bank could start buying commercial paper from banks this month itself, and continue the scheme until April. The BoJ is expected to formally decide on the measure when its policy board meets next week, it said.

The BoJ has little room to reduce its rock-bottom interest rates further, so it is seeking alternative tools to repair credit markets that have been battered by the global financial crisis. Although Japan's financial system has been less severely affected than those of the United States and some European countries by the credit crunch, Japanese companies say they are finding it harder to raise funds.

Australia struggles to cope with recession
Australia is prepared to deliver extra stimulus to help cushion the economy if the global recession worsens, acting Prime Minister Julia Gillard said. "We have been affected by the financial situation already and we have already invested in the economy, which is not immune," Gillard told Australian Broadcasting Corporation radio yesterday.

Since October, Prime Minister Kevin Rudd has announced almost A$45 billion ($30 billion) in aid for families, pensioners, bond markets, home buyers, and extra spending on schools and roads to ensure the economy doesn't enter its first recession in 17 years.

Reserve Bank of Australia Governor Glenn Stevens has embarked on the biggest round of interest-rate cuts in almost two decades. Other options to stoke consumer spending include bringing forward planned tax cuts, increasing the reductions for lower and middle-income earners, and raising pensions.

Australia's economy expanded at its weakest pace in eight years in the third quarter. The unemployment rate rose to 4.5 per cent in December, the highest in almost two years, as mining companies, airlines, and automakers fired full-time workers, adding to signs that the economy faces its first recession since 1991.

Export prices for coal and iron ore from Australia, the world's biggest shipper of the raw materials, may drop significantly this year as slowing industrial growth curbs demand, the Reserve Bank said yesterday. Trade makes up one- fifth of the economy.

Treasurer Wayne Swan has increased the amount of bonds on issue by almost 10 per cent to A$60 billion. He has also provided an extra A$8 billion for low-risk residential mortgage backed securities to spur housing. Unlike the US, which is forecast to run a budget deficit of nine per cent of gross domestic product in fiscal 2009, Australia still has a mild budget surplus.

Europe: ECB slashes interest rate
To combat the Eurozone recession, the European Central Bank on Friday cut interest rates by a further half-point to 2 per cent, equalling previous record lows for the single currency era. The ECB has now cut rates by 2.25 percentage points since October.

Trichet, the ECB president, indicated that the bank was set to cut Eurozone rates further in March. "We didn't say that it was now the limit and we would not move any more," he said.

Canada: All eyes on Obama
Although the budget being prepared by Canadian Prime Minister Stephen Harper is intended to boost economic growth, the country's economy is so closely tied with those of the United States and Europe that its revival depends more on what its southern neighbour does than what its own conservative government does.

With the US picking up 80 per cent of Canada's exports, all eyes are on US president-elect Barak Obama and his recovery plans. The incoming Democratic team too seems aware of the importance of Canada in the US economic picture.

"In our efforts to return to economic growth here in the United States we have an especially critical need to work more closely with Canada, our largest trading partner, and Mexico, our third largest," Hillary Clinton, Obama's choice for secretary of state, told the US Senate this week. But while the commitment to improve bilateral relations is a good sign, there are serious questions about how the new Democratic administration's policies will work in practice for Canada.

The possibility that Obama would want to renegotiate the North American Free Trade Agreement, as he suggested during the overheated crucible of the Ohio Democratic primary, now appears remote, according to most observers. What is more worrying is the prospect that the new president, along with allies in Congress, may bring in fresh barriers to slow or distort trade.

"One of the great dangers in a global recession is that people start erecting trade walls or tariff walls," Prime Minister Harper has warned. Canada has already experienced damaging trade disputes with Americans over wheat, beef, forestry and other products.

Africa: Down but not out
The economic situation in Africa is not as dire as it might have been, although it is undoubtedly serious. Clearly, the repercussions of the global financial crisis will be felt throughout Africa. Dwindling remittances from Africans working abroad, lower prices for exports, scarcer and more costly commercial credit, and less generous flows of foreign aid are certain to dampen productive activity across the continent.

African ministers of finance and planning, after a last Monday, warned that the crisis "constitutes a major setback at a time when African economies were turning the corner". The impact of the global financial crisis, in combination with high food prices, volatile oil markets and the repercussions of climate change will worsen conditions for millions of poor Africans. "We are facing a human as well as financial crisis," they said.

Fortunately, seven consecutive years of relatively high growth have allowed a number of countries to build up their monetary reserves and improve external financial balances, providing a cushion at least for the short term. Further, economic reforms to enhance the productivity and efficiency of Africa's farms, factories and markets have made some of its economies more resilient.

On 6 November, the International Monetary Fund (IMF) released forecasts showing that economic growth in all regions will slow markedly. But Africa's performance will still be relatively strong, with 5.2 per cent average growth in GDP projected for 2008 and 4.7 per cent for 2009. That compares favourably not only to the industrialized economies, but also to the growth rates of some other developing regions, such as Latin America and the Caribbean.

On 1 December, the UN's Department of Economic and Social Affairs (DESA) released somewhat gloomier projections, saying Africa's GDP growth is likely to decline from 5.1 per cent in 2008 to 4.1 per cent in 2009. But that will still be higher than in Latin America and will stand in stark contrast to the dismal prospects for developed nations.

Another reason the global turmoil will have a less severe impact in Africa is that capital controls, good supervision and strong regulation have kept the continent's banks focused on domestic deposits and relatively secure investments. They therefore had little exposure to sub-prime mortgages and other dubious loans.

For many poorer African countries in particular, extensive debt write-offs in recent years have contributed to stronger balance sheets. The continent's total official debt fell to $144.5 billion in 2007 from $205.7 billion in 1999. Because these countries now have to spend much less on servicing foreign debt, they have more left for strengthening social services and productive capacities.

However, though the sources of African economic growth may now be more diverse, the continent still relies heavily on sales of oil, minerals, coffee and other raw materials. Exports of Africa's beverage crops - cocoa and coffee from Côte d'Ivoire, or tea from Kenya - are sensitive to downturns in US and European markets.

A number of African countries have benefited in recent years from robust sales of clothing and textiles to the US under the favourable market-access provisions of its Africa Growth and Opportunity Act, but those too may be in jeo­pardy as US consumers buy fewer goods.

Prices of metals, which had been relatively high for several years, have also crashed, dealing a blow to producers like Zambia, the Democratic Republic of the Congo (DRC), and Burkina Faso. The latter, already hit by low world prices for its major export cotton, was counting on the opening of several new gold mines to boost its economy. But with the prices of gold down 18 per cent, the plans have been put on hold.

Major African oil producers such as Nigeria, Angola and Algeria, have had to scale back their expenditure plans, which were based on the high oil price prevailing till recently, as the prices have fallen by more than half in just three months. Even if oil-exporting countries reduce production, the IMF projects that through 2009 oil prices will remain only moderately higher than their current levels.