UN says world economy to shrink 2.6 per cent in 2009

Downgrading its economic forecast for 2009, the United Nations said that the world economy is expected to shrink by 2.6 per cent in 2009, which is a further 0.4 per cent decline from its January forecast.

Releasing the mid-year report by UN department of economic and social affairs (DESA) yesterday, the world body said that the decline comes after an expansion of the global economy by 2.1 per cent in 2008 and nearly 4 per cent per year during 2004-2007.

It said that the hardest hit would be the developing countries and added that should current policy measures take traction, a mild recovery may be expected in 2010, says a UN mid-year report, World Economic Situation and Prospects 2009 (WESP).

The report says that the world economy is deeply mired in the most severe financial and economic crisis since World War II. With its increasing impact both in scope and depth worldwide, the crisis poses a significant threat to world economic and social development, including the fulfilment of the Millennium Development Goals (MDGs) and other internationally agreed development goals.

While a mild recovery in growth of world gross product (WGP) is possible for 2010, the report says a more prolonged global recession is also possible if the vicious cycle between financial destabilisation and retrenchment in the real economy cannot be sufficiently contained and oncerted global policy actions are not taken.
Early recovery unlikely

It said that between September 2008 and May 2009, the market capitalisation of banks in the US and Europe declined by 60 per cent or $2 trillion. But despite enormous write-downs and assive financial sector rescue operations by governments, problems have not gone away.

''If financial markets do not unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in most countries with the global economy stagnating at lower welfare levels well into 2010,'' says the report.

The report goes on to say that the crisis originated in developed countries, but it is now evident that developing countries are being hit disproportionately hard through capital reversals, rising borrowing costs, collapsing world trade and commodity prices, and subsiding remittance flows, the UN reports.

The decline of world trade since the end of 2008 has been dramatic. In the first quarter of this year, trade dwindled at an annual rate of more than 40 per cent. For 2009 as a whole, the volume of world trade is expected to fall by more than 11 per cent, the largest decline since the crisis of the 1930s.

The crisis is also disproportionately affecting migrant workers. As a result, workers' remittances have declined significantly, affecting especially an important number of the small middle- and low-income countries, which heavily depend on such inflows, sometimes as much as 20 per cent of GDP.

Serious balance-of-payments constraints are affecting an increasing number of developing countries. Their total external financing gap could increase to between $200 billion and $700 billion yearly. Foreign-exchange reserves of about 30 low-income countries have already fallen below the critical value equivalent to three months of imports.

Unemployment will continue to rise
According to the UN's baseline scenario, world income per capita is expected to decline by 3.7 per cent in 2009. At least 60 developing countries, (of 107 countries for which data are available) are expected to suffer declining per capita incomes.

Only 7 countries, down from 69 countries in 2007 and 51 in 2008, would register per capita GDP growth of 3 per cent or higher, which is considered to be the minimum required growth rate for achieving significant reduction in poverty.

The report says that a rapid rise in unemployment has taken place since 2008 and is expected to worsen in 2009-2010. Initial projections of 50 million unemployed over the next two years could easily double if the situation continues to deteriorate.

''Lessons from past financial crises indicate that it typically takes four to five years for unemployment rates to return to pre-crisis levels after economic recovery has set in,'' says the report.

Developing countries hardest hit
The report said that the global crisis is also severely affecting developing countries in Asia after a prolonged period of fast growth.

The sharpest declines in international trade have been observed among Asian economies, in some cases at annualized rates of 50 per cent or more. China with 23 per cent in April 2009 and India 2 per cent, have also registered significant year-over-year declines in their exports for the first time in decades.

Growth in developing Asia is expected to be halved to about 3 per cent in 2009, with setbacks in employment and poverty reduction.

The report says workers are already visibly shifting out of dynamic export-oriented sectors and either becoming unemployed or displaced to lower productivity areas (i.e. moving back from urban to rural areas). In China alone, 20 million workers were displaced in this sense at the end of 2008.

Economies in Africa and Latin America and the Caribbean are being hit even harder. In 2009, the report predicts, GDP growth in Africa is expected to slow to 0.9 per cent, down from 4.9 per cent in 2008.

South American economies are expected to shrink by almost 1 per cent on average in 2009, while Mexico and the Central American economies are projected to fall by more than 4 per cent.

The reduction in employment and income opportunities in developing countries will certainly lead to a considerable slowdown in progress towards poverty reduction and the fight against hunger. The UN report estimates that between 73 and 103 million more people will remain poor or fall into poverty in comparison with a situation in which pre-crisis growth would have continued.

''Most of this setback will be felt in East and South Asia, with between 56 and 80 million people likely to be affected, of whom about half are in India. The crisis could keep 12 to 16 million more people in poverty in Africa and another 4 million in Latin America and the Caribbean,'' says the report.

Benefits of coordinated global response
The report applauds the global policy response, saying that ''unprecedented steps to address the financial crisis have been taken,'' including monetary, financial and fiscal measures to stabilize financial markets and revive global growth.''

It predicts that the crisis, if it continues much further, will have profound consequences on global security and stability.

The report says the additional liquidity to be provided as agreed by the 'Group of 20', while significant, is insufficient to give developing countries the resources they need to ensure a more balanced global stimulus aligned with long-term development needs.

Eighty per cent of the stimulus is concentrated in developed countries, while most developing countries lack the fiscal space to provide social protection and counteract the consequences of the crisis.

In a more balanced global response, about $500 billion in additional development finance would be made available for countercyclical responses by developing countries.

The report confidently predicts that with a coordinated, development-oriented policy scenario, the world economy would recover to an annual growth of 4-5 per cent in 2010-2015, led by a robust growth of 7 per cent per year in developing countries.

This is in contrast to the uncoordinated scenario in which developing countries would recover at only half that rate.