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UN says global economy will shrink by 2.6%

29 May 2009 11:08 (UTC +04:00)

Bakuâ€“ APA-Economics. While a mild global economic recovery next year is possible if current policy measures take traction, the financial forecast appears particularly gloomy, said a United Nations report released here on Wednesday morning.
In a mid-year update to its World Economic Situation and Prospects 2009 report issued in January, compared to its prior worst case scenario of a drop of 0.5 percent the United Nations now expects a global economic contraction of 2.6 percent this year, hitting developing countries, which are being hit by capital reversals, rising borrowing costs, subsidizing remittance flows, and collapsing world trade, according to the report produced by the United Nations Department of Economic and Social Affairs (DESA).
"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," said the report.
In particular, the report says that while the additional liquidity to be provided by the G20 is "significant," it falls short of providing developing countries with the resources they need to ensure long-term development.
"At present the stimulus is very unbalanced," the report says. "Eighty percent 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 the report, DESA argues for a more balanced and coordinated macroeconomic approach, which would include an additional 500 billion U.S. dollars in development finance. This would result in "significant global growth gains."
As a result, if a more coordinated, balanced approach was taken, the report argues that the world economy would recover to an annual growth rate of 4 or 5 percent from 2010 to 2015, "led by a robust growth of 7 percent per year in developing countries."
Meanwhile, economies in Africa, Latin America and the Caribbean are being hit the hardest by the current economic crisis. In 2009,the report predicts, growth of gross domestic product (GDP) in Africa is expected to slow to 0.9 percent, down from 4.9 percent in 2008. South American economies are expected to shrink by almost one percent on average in 2009, while Mexico and the Central American economies are projected to fall by more than 4 percent.
In Asia, sharp declines in international trade are expected to halve growth to 3 percent in 2009, with setbacks in employment and poverty reduction.
A rapid rise in unemployment has taken place since 2008 and is expected to only get worse. Initial projections of 50 million unemployed over the next two years could "easily double if the situation continues to deteriorate," said the report.
World income per capita is expected to decline 3.7 percent in 2009, the United Nation’s updated report says, adding that unemployment is expected to worsen in 2009-2010.
"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," added the report.
In its report, DESA also put forth a more optimistic, "but increasingly less likely" scenario where world economic recovery would begin in the second half of 2009 and the world gross product would expand by 2.3 percent in 2010.
However, this requires that problems in financial markets be resolved in the first half of 2009 and as it is now May, and "the economic landscape remains winterly with no visible green shoots to be seen," DESA’s more optimistic prognosis seems highly unlikely.