World Economic Situation And Prospects 2009-2010

World Economic Situation and Prospects 20092010 May 2009

Rob Vos United Nations

www.un.org/esa/policy

Main messages 1. 2.

Worst financial crisis since World War II Global economy is in recession • • •

3. 4.

Synchronized downturn, no green shoots yet Rising unemployment Setbacks in progress to poverty reduction and other MDGs

Downside risks of a prolonged global recession Policy challenges: • • • •

Further decisive and cooperative action is needed to restore the financial health of banks Fiscal stimulus measures should be better coordinated and aligned with global sustainable development objectives Deeper reforms of the international financial architecture should urgently be set in motion A new framework for global economic governance 2

Mar-06 May-06 Jul-06 Sep-06 Nov-06

Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

Spread of interbank lending, %

Jan-07

Credit crunch in the US is easing somewhat… …

5.0

4.5

4.0 3.5

3.0

2.5

2.0

1.5 1.0

0.5

0.0 Jan-06

3

… but borrowing costs for developing countries remain elevated; private capital flows are reversing 10 Africa Asia Latin America Europe

8 6 4 2 0 Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

4

World trade growth is collapsing 12

10.9 9.2 7.7

Annual percentage change

8

6.6 4.1

4

2.4

0 2004

2005

2006

2007

2008

2009

2010

-4

-8

-12

-11.1

5

After a plunge, oil prices are back to 2005 level 140

Nominal price Real price

$ per barrel, monthly average

120 100 80 60 40 20 0 2002

2003

2004

2005

2006

2007

2008

2009 6

Jul2002

Jul2003

Maize

Jan2003

Wheat

Jan2002

Jan2004

Jan2005 Jul2005 Jan2006 Jul2006 Jan2007 Jul2007 Jan2008 Jul2008 Jan2009

Rice

Jul2004

500

Jul2001

450

400

350

300

250

200

150

100

50 Jan2001

World food prices remain at lower levels, though still above historic levels

Index, 2000 = 100

7

World economy is in recession, recovery is uncertain 5 4.0

3.9

4

3.9 3.5

3 2

Optimistic 2.7

2.1 1.6

1 0

Pessimistic 2003

2004

2005

2006

2007

2008

2009

2010

-1 -2 -2.6

-3

8

World income per capita is declining in 2009 10

GDP per capita annual growth %

8 6 4 2 0 2004

2005

2006

2007

2008

2009

2010

-2 -4 -6 Developed countries

Economies in transition

Developing countries

9

60 developing countries will see declining incomes in 2009 (number of countries with declining per capita incomes) 70 60 60 50 40

Developed countries Economies in transition Developing countries

33

30 20

22 18 13

12

14

10

2

1 0 2008

2009

2010 10

Severe recession in developed economies 8 6.1

GDP growth rate, %

6 4.0

4 2

2.7

2.4

2.0 1.1

1.5

1.0

1.5 0.4

0.0

0.7 -0.1

0 -0.6

-2 -4

-0.4

-1.1

-3.5

-1.7

-3.7

-6 -7.1

-8

USA 2007

2008

Japan

EU15

2009

2010 Pessimistic scenario

2010 Baseline

NewEU 11

Sharp contraction of economic activity in the economies in transition… … 10

8.5

8 GDP growth rate, %

6.2 5.4

6 4.2

4 2

1.5

1.0

0 -0.3

-2

-0.6

-1.9

-4 -6

-5.4

South-eastern Europe 2007

2008

2009

CIS 2010 Baseline

2010 Pessimistic scenario

12

Developing countries are being hit hard through trade and finance channels • Spill-over effects through financial markets are hitting strongest on the middle-income countries • All developing countries are affected through slowing trade. • Primary exporters are also seeing deterioration in terms of trade • Low-income, net food and oil-importers are seeing improving terms of trade, but are suffering mainly through reduced demand for exports • Balance of payments constraints are emerging in growing number of countries and vast reserves are quickly evaporating 13

Leading to slowdown of growth in all developing countries 9.6

10

8.5

GDP growth rate, %

8 6

7.6 6.8 6.1

6.0

5.4 4.3

4.0

5.4 4.1

3.9

4 2

5.6

4.9

3.1

3.0 1.4

2

5.5

4.9 4.5

4.0 2.9

1.7

1.7

0.9

0 -0.7

-2

-0.7

-1.1 -1.8

-4

Developing countries

Africa 2007

2008

East Asia 2009

South Asia

2010 Baseline

Western Asia

Latin America

2010 Pessimistic scenario

14

3.Downside risks • Deeper and prolonged crisis (a)prolonged credit crunch in major economies and deeper recession (b)steep capital reversals in emerging markets (c)less ODA for low-income countries

• Global imbalances 15

120

135

0.70

0.80

0.90

Apr 04 Jul 04 Oct 04 Apr 05 Jul 05

Yen/US$

Jan 05

Oct 05 Jan 06 Jul 06 Oct 06

Euro/US$

Apr 06

Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09

The dollar volatility continues

105

90 Jan 04

0.60

16

…and global imbalances persist, though narrowing in deflationary spiral 600

United States

400

Japan

Billion US$

200

0

European Union -200

-400

-600

Developing countries (excl China) and EiT

-800

China 2004

2005

2006

2007

2008

2009

17

4. Policy challenges (1) • We have seen extraordinary responses to deal with the crisis – $18 trillion of public funding (30% of WGP) allocated to financial sector – $2.6 trillions fiscal stimulus (4% of WGP spent over 2009-2011) planned, less than the desired level of 2-3% of WGP annually – Financial landscape has changed – Coordinated monetary responses 18

4. Policy challenges (2) • More and even bolder action is needed: – Decisive and cooperative action is needed to restore the health of financial sector. – Align fiscal stimulus with global sustainable development objectives – Fundamental reforms of the international financial system are needed to overcome the systemic flaws 19

– A new framework for global economic