PRESS CONFERENCE ON GLOBAL ECONOMIC OUTLOOK

PRESS CONFERENCE ON GLOBAL ECONOMIC OUTLOOK

The terrorist attacks on 11 September in the United States will further slow a world economy already growing at its lowest rate in a decade and hamper long-term growth as well, according to a report released by the United Nations Department of Economic and Social Affairs at Headquarters this morning.

“The shock is expected to reverberate through the world economy and global financial markets in the coming months”, says the report, which was prepared as an update to the World Economic and Social Survey 2001.  Military and political reactions to the attacks will “greatly amplify” existing uncertainties about the short-term global outlook and should have significant effects in the long run, it states.

World gross product (GWP) is expected to grow at only 1.4 per cent in 2001, compared to the previous estimate of 2.4 per cent, with a partial recovery to 2 per cent in 2002.  International trade is expected to register “virtually no growth” in 2001, although that figure should increase by 4-5 per cent in 2002.

“The first and most fundamental point is that the world economy was already in a state of slowdown”, said Ian Kinniburgh, Director of Development Policy Analysis at the Department of Economic and Social Affairs.  “Then we had the economic shock generated by the events of 11 September.  Those events came at a very unfortunate time.”

A worse downturn than expected is forecasted for the United States, where the attacks should cause “an absolute decline in Gross Domestic Product (GDP) in the third and fourth quarters”.  Among developed countries, the slower U.S. economy should affect Canada the most, but Japan’s performance is expected to be weakest, with GDP likely to decline more than 0.5 per cent in 2001.

The most severely affected developing economies are expected to be South and East Asia, where GDP growth projections for 2001 have dropped from 4.1 per cent to 1.7 per cent.  In Africa, GDP growth should fall from an expected 4.3 per cent to 3.0 per cent in 2001 and in Latin American from 3.1 per cent to 0.8 per cent.

Several major economic impacts of the terrorist attacks are pointed out in the report.  The first is a destruction of human and physical capital, which in physical terms has already been estimated at about $40 billion in the United States.  If the current military campaign escalates, this could increase and more economies be drawn in, the report states.

The attacks have disrupted business in general, mostly in the United States, hurting airlines, insurance companies, travel agents and financial traders the most.  But the report notes that “the damage is spilling over to more and more sectors, such as manufacturing, retailing and technology”.  Hundreds of companies in the United States have lowered their earnings estimates by a further 10 per cent for the third and fourth quarters of 2001 because of the attacks.

In addition, consumer and business confidence has dropped since 11 September, beginning with the sharp decline in equity markets.  “This decline in

confidence has a particularly profound effect because of its effect on spending practices”, Mr. Kinniburgh said.

Macroeconomic policies have shifted in major economies, with more than a dozen central banks cutting interest rates.  Government spending rose in the United States with the approval of about $40 billion for emergency aid and a further $90 billion in other spending and tax reductions.  Defense costs in the United States could increase dramatically in the coming years, although this may boost economic growth in the short-term.

Other consequences will occur, including a drop in international trade and reduced private investment in developing and transition economies, says the report.  Also, the attacks could have “triggered a turning point for the exchange rates between the US dollar and other major currencies”, the report states.  For many international investors, the attacks may have changed both the image of the United States as a “safe-haven” and their underlying optimism about the US economy.

Asked about the impact of 11 September on the oil market, Mr. Kinniburgh said the Middle East was not directly affected by the ongoing conflict.  The only effect at the moment was a slowdown in demand that had pushed prices down, due to the weaker world economy, he said.

 Another correspondent asked what effect the attacks might have on world poverty.  He replied that most developing regions were growing at a rate around or less than their population growth, so that this year they would achieve little growth.  “These types of hiccups have a profound effect on growth in developing countries … richer countries are better at protecting themselves from this type of shock”, he said.

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