World economy to shrink further
The United Nations on Wednesday downgraded its economic forecast for
2009, projecting the world economy to shrink by 2.6 percent this year,
with the poorest countries to be hit the hardest.
United Nations warned that the world economy is likely to
get worse before it gets better.
The downgrade comes on top of an already pessimistic UN estimate five
months ago, when it had projected a decline by 0.5 percent.
The even grimmer economic picture has been outlined by the UN
Department of Economic and Social Affairs (UN-DESA) in its mid-year
report "World Economic Situation and Prospects 2009".
It said that the decline comes after an expansion of the world
economy by 2.1 percent in 2008 and nearly 4 percent per year during
2004-2007. Should current policy measures take traction, a mild recovery
may be expected in 2010, said the report.
The gloomy outlook presented by UN-DESA has been echoed in another
report on the economic situation in Africa. This report published
jointly by the UN Economic Commission for Africa and the African Union
Commission says that Africa's real GDP growth is expected to fall to 2.0
percent in 2009 from 5.1 percent in 2008. Regional growth rates in 2009
are projected to range from -1.2 percent in Southern Africa to 1.9
percent in Central Africa, 3.1 percent in North Africa, 3.1 percent in
West Africa and 3.8 percent in East Africa.
The joint report says that the chances for growth rebound in Africa
in 2009 are slim and hinge on the ability of the economic stimulus
packages being implemented in developed and some advanced developing
countries to enhance domestic demand as well as demand for commodity
exports from Africa.
According to the UN-DESA report, 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 cautions that a more prolonged global
recession is also possible if the vicious cycle between financial
de-stabilization and retrenchment in the real economy cannot be
sufficiently contained and concerted global policy actions are not
The report underscores that while the crisis originated in developed
countries and these countries are also leading the economic downturn,
developing countries are being hit hard as well through capital
reversals, rising borrowing costs, collapsing world trade and commodity
prices, and subsiding remittance flows.
In the baseline scenario, world income per capita is expected to
decline by 3.7 percent in 2009. At least 60 developing countries (of 107
countries for which data are available) are expected to suffer declining
per-capita incomes, while only 7 would register per-capita GDP growth of
3 percent or higher - considered as the minimum required growth rate for
achieving significant reduction in poverty - down from 69 countries in
2007 and 51 in 2008.
The deepening of the global financial crisis entails a heavy toll on
employment worldwide. A rapid rise in the unemployment has been
witnessed since 2008 and is expected to worsen in 2009-2010. Initial
projections put the rise in unemployment at 50 million over the next two
years, but as the situation continues to deteriorate, this number could
Noting that the reduction in employment and income opportunities no
doubt will lead to a considerable slowdown in progress towards poverty
reduction and the fight against hunger, UN-DESA estimates that between
73 and 100 million more people would remain poor or fall into poverty in
comparison with a situation in which pre-crisis growth would have
Most of this setback will be felt in East and South Asia, with
between 56 and 80 million 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. The
report says that growth in Africa is sharply decelerating, mostly driven
by collapsing world trade and commodity prices, lower foreign direct
investments, subsiding remittances, and falling tourism revenues. In
2009, GDP growth is expected to slow to 0.9 percent, down from 4.9
percent in 2008.
Emerging balance-of-payments problems have caused strong currency
depreciations in many African countries, pushing up domestic prices of
imported goods, including food prices. Unemployment and precarious
employment are on the rise as lower export earnings and government
revenue are affecting all economic activity. Conditional on global
recovery, Africa's growth is expected to pick up in the second part of
2010 in the baseline scenario. However, real threats are looming if the
recovery of the global economy is postponed and aid flows stagnate.
Despite seemingly strong macroeconomic fundamentals, says the report,
East Asia has suffered a severe economic downturn since September 2008.
GDP growth in the region is expected to slow from an average of 6.1
percent in 2008 to 3.0 percent in 2009. Over the past six months,
collapsing final demand in developed economies, combined with major
reversals of capital flows, have led to sharp contractions of exports,
industrial production and investment spending in most countries of the
region. Also, China is expected to register much slower growth in 2009
than in recent years.
In the baseline forecast, regional economic growth is expected to
return to a relatively robust 5.6 percent in 2010, led by a recovery of
domestic demand in China fuelled by the massive fiscal stimulus package
the country is implementing. The region's growth recovery would further
depend on recovery in developed economies.
Economic activity in Latin America and the Caribbean deteriorated
rapidly at the end of 2008, dragged down by weakening external demand
and rapid contraction of domestic demand due to tight credit conditions
and fears of growing unemployment. After five consecutive years of
growth of more than 4.0 percent per annum, GDP will fall by 1.9percent
in 2009, before rebounding to 1.7 percent in the baseline forecast for
Mexico and Central America are expected to be hit hard, given their
strong dependence on manufactured exports to and workers remittances
from the United States. Most South American countries are dependent on
primary exports and will be affected most by lower commodity prices.
Capital reversals and the rising costs of external borrowing are
affecting domestic activity and private investment, despite swift policy
responses in some countries, such as Brazil in the last quarter of 2008.
The Caribbean will see a mild growth in 2009, reflecting relatively
strong economic performance in Cuba, expected from the easing of US
restrictions on Cuba's economy.
The report also notes that net private capital inflows to emerging
economies (which consist of some 30 large developing countries and
economies in transition) are estimated to have declined by more than 50%
during 2008, dropping from the peak level of more than $1 trillion in
2007 to less than $500 billion.
A further dramatic decline of 50% is expected for 2009. Among all the
components of net private capital inflows, the sharpest drop was in bank
lending to emerging economies, reversing inflows of about $400 billion
in 2007 into a projected net outflow in 2009.
Net portfolio equity investments reversed to outflows from emerging
economies, as international investors reacted aggressively to the sell
off in the equity markets worldwide. While FDI flows are less volatile
than other components of private capital flows, they also declined by
15% in 2008.
In the outlook, net private capital flows to developing countries and
economies in transition are expected to scale back further in 2009-2010.
Institutional investors in developed countries are expected to
continue reducing their exposure in emerging economies, while
international banks may further curtail their cross-border lending.
Various banking rescue measures adopted in developed countries might
in effect exacerbate this trend, says the report.
Collapsing world trade is hurting developing countries
disproportionately hard. Trade flows worldwide sharply declined from the
end of 2008 and have continued to decline in the first quarter of 2009
at an annual rate of more than 40% in the three months up to February
For the year 2009, the volume of world trade is expected to fall by
11%, the largest annual decline since the Great Depression of the 1930s.
The impact of falling global demand is compounded by a drying up of
trade finance and a rise in protectionist trends.
The sharpest declines in trade have been observed among Asian
economies, in some cases at annualized rates of 50% or more.
Also China (23% in April 2009) and India (2%) have registered
significant year-over-year declines in their exports for the first time
The report highlights some areas in which more concerted action would
be needed. Amongst others, further decisive and cooperative action is
needed to restore the financial health of banks, especially in developed
In addition, the fiscal stimulus measures should be better
coordinated and aligned with global sustainable development objectives.
Thus far, there has been no true coordination of the fiscal measures
being undertaken by national governments.
At present, the stimulus is very unbalanced, in that 80% 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 counter-cyclical
responses by developing countries.
Furthermore, fundamental reforms of the international financial
system are needed to overcome the systemic flaws which caused this
crisis in the first place and in order to guard against future crises.
Such reforms should first deal with the major weaknesses in the
regulation and supervision of the international financial system.
A macro-prudential regulatory system needs to be created, based on
counter-cyclical capital provisioning, to develop institutions for the
supervision of all financial market segments concentrating systemic
risk, including hedge funds and cross-border flows, says the report.
- Third World Network Features
(The writer is the Editor of the South-North Development Monitor
(SUNS), Geneva, Switzerland)