LINK GEO&

United NationsWorld Economic

Situation and Prospects 2009-

2010 Update May 2009

Rob VosUnited Nations

www.un.org/esa/policy

2

Main messages1. Severest crisis since Great Depression:

• World economy will shrink by 2.6% in 2009• Systemic crisis

2. Synchronized downturn• Led by developed countries, but emerging economies

and other developed countries hard hit• Some see “green shoots”, but none signal recovery as

yet• Rising unemployment, setbacks in poverty reduction

3. Recovery in 2010 is possible, but downside risks of a prolonged global recession are still high

4. 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

3

Credit crunch in the US is easing somewhat…

Spread of interbank lending, %

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-

06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

4

… but borrowing costs for developing countries remain elevated; private capital flows are reversing

0

2

4

6

8

10

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

AfricaAsiaLatin AmericaEurope

5

World trade growth is collapsing

10.9

7.79.2

6.6

2.4

-11.1

4.1

-12

-8

-4

0

4

8

12

2004 2005 2006 2007 2008 2009 2010

Ann

ual p

erce

ntag

e ch

ange

0.5

6

World economy is in recession, recovery is uncertain

3.9

2.1

-2.6

1.6

3.9

3.5

2.7

4.0

-3

-2

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008 2009 2010

Optimistic

Pessimistic

7

Severe recession in developed economies

1.1

-0.6

0.7

4.0

-3.5

-7.1

-3.7

-1.7

1.01.5

-0.1

1.5

0.00.4

-1.1-0.4

-8

-6

-4

-2

0

2

4

6

USA Japan EU15 NewEU

GD

P gr

owth

rat

e, %

2008 2009 2010 Baseline 2010 Pessimistic scenario

8

Sharp contraction of economic activity in the economies in transition…

4.2

5.4

-1.9

-5.4

1.01.5

-0.3 -0.6

-6

-4

-2

0

2

4

6

8

South-eastern Europe CIS

GD

P gr

owth

rat

e, %

2008 2009 2010 Baseline 2010 Pessimistic scenario

9

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.

• Falling remittances are affecting many small developing economies

• Balance of payments constraints are emerging in growing number of countries and vast reserves are quickly evaporating

10

Leading to strong growth deceleration in all developing countries

5.44.9

6.16.8

4.54.0

1.40.9

2.9

4.1

-0.7

-1.9

4.3 4.0

5.7 5.4

2.9

1.7

-3

-2-1

01

23

45

67

8

Developingcountries

Africa East Asia South Asia WesternAsia

LatinAmerica

GD

P gr

owth

rat

e, %

2008 2009 2010 Baseline

5.44.9

6.16.8

4.54.0

1.40.9

2.9

4.1

-0.7

-1.9

2.0 1.7

3.93.1

-1.1-0.7

-3

-2

-1

0

1

2

3

4

5

6

7

8

Developingcountries

Africa East Asia South Asia Western Asia LatinAmerica

GD

P gr

owth

rat

e, %

2008 2009 2010 Pessimistic scenario

11

60 developing countries will see declining incomes in 2009(number of countries with declining per capita

incomes)

12

33

18

1

14

2

13

60

22

0

10

20

30

40

50

60

70

2008 2009 2010

Developed countriesEconomies in transitionDeveloping countries

12

Setbacks in poverty reduction

Slowdown poverty reduction compared

with pre-crisis growthTotal 73 – 103 million

Africa 12 – 16 million

East and South Asia 56 – 80 million

Latin America and Caribbean

~ 4 million

13

3.Recovery possible in 2010, but downside risks are high

• Quick recovery only if– financial sector problems bottom out soon– fiscal stimulus gains traction soon– …but even then, recovery maybe feeble without

enhanced, concerted countercyclical responses

• Deeper and prolonged crisis(a) Prolonged credit crunch in major economies and deeper

recession(b) Global imbalances and risk of exchange instability(c) Continued steep capital reversals in emerging markets(d) Less ODA for low-income countries(e) Protectionist tendencies

14

The dollar volatility continues

65

75

85

95

105

115

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

0.60

0.65

0.70

0.75

0.80

0.85

Yen/$ (LHS) Euro/$ (RHS)

15

…and global imbalances persist, though narrowing in deflationary spiral

-800

-600

-400

-200

0

200

400

600

2004 2005 2006 2007 2008 2009

Billi

on U

S$

United States

Japan

European Union

Developingcountries (exclChina) and EiT

China

16

• We have seen extraordinary responses to deal with the crisis– $18 trillion of public funding (30% of

WGP) allocated to financial sector– $2.7 trillion of 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

4. Policy challenges (1)

17

• More and even bolder action is needed:– Decisive and cooperative action is needed to restore the

health of financial sector. – Stronger, better coordinated fiscal stimulus, greater

policy coherence:• More balanced stimulus (stronger in surplus, weaker

in deficit countries; facilitate countercyclical responses developing countries)

• Coherence with development financing policies• Coherence with trade policies (no protectionism;

enhanced access to markets for developing-country exports and Aid for Trade)

• Coherence with climate change and food security, and more broadly with global sustainable development objectives

• Coordination medium-term financing of stimulus and safeguards against major exchange rate misalignments

4. Policy challenges (2)

18

Global gains from improved policy coordination

19

20

• More and even bolder action is needed:– Outcomes remain uncertain, policies will

need to be closely monitored and consulted with business community and society

• Fundamental reforms of the international financial system are needed to overcome the systemic flaws

• A new framework for global economic governance

4. Policy challenges (3)