PRESS BRIEFING ON WORLD ECONOMIC SITUATION

There was more bad news in the United Nations' analysis of world economic developments -- world economic growth was the lowest in a decade and the prospects for 2002 were no better, the Director of the Policy Analysis Division, Department of Economic and Social Affairs (DESA), told correspondents today at a Headquarters press briefing. 

The slightly better news was that the recession was about to "bottom out" and pick up slightly in 2002, said Ian Kinniburgh, upon the issuance of a report entitled "World Economic Situation and Prospects 2002".  The analysis, prepared jointly by DESA and the United Nations Conference on Trade and Development (UNCTAD), was a supplement to the annual World Economic and Social Survey.  Published in July each year, it was updated in light of the changing international economic situation.  The growth of gross world product, at 1.3 per cent last year, was the lowest in a decade, and the estimate for 2002 was 1.5 per cent. 

The slowdown had been extremely widespread, he went on.  That might not be the worst recession in the post-war period globally, but that was probably one of the most widespread.  In 2001, a great majority of countries grew much more slowly than in 2000.  There were now some dozen large economies in the world in what was technically called a recession.  Things were about to "bottom out".  That meant that things would not deteriorate further; things were at the bottom of the recession and were expected to pick up slightly in 2002.  Not only would the recovery be slow, it would be dispersed.

Mr. Kinniburgh said that the main purpose of the report was to update his analysis of world economic developments, particularly now in light of the changing international economic situation, and to set the stage for intergovernmental discussions during the first half of the year.  He had sought to provide those meetings with an "economic backdrop" on the United Nations' view of the economic outlook for the year.  The estimate of a 6 per cent growth in world trade had been made in July 2001.  That figure now had been modified downward to 3 per cent. 

The major conclusion was that world economic growth in 2001 was the lowest in a decade, he said.  The depressing feature had been the virtual stagnation in international trade, which, in the 1990s until 2000, had been an engine of growth.  Last year, that engine was lost, and growth of world product was the lowest in a decade.  More bad news was that there was a double-barrelled impact, as the prospects for 2002 did not indicate any marked acceleration.  That growth was forecast at 1.5 per cent globally, which was only fractionally better than the 2001 estimate.  There had been two consecutive years of slow growth.

He said the recovery was expected to start in the United States and gradually spread around the world.  Some of the developing and other countries would be slower to pick up than the United States.  The main factors that would support the recovery were the economic stimulus measures, the relaxation of monetary policy, and declines in interest rates.  Everybody knew that there had been particularly aggressive cuts in the United States and elsewhere.  Then gradually, the private sector, businesses and consumers would also pick up.  One reason for the slowness of the recovery had been the reliance on the United States to "kick start" it. 

He admitted that it was a rather dangerous game to rely on one economy, however large, when that economy, itself, had some potential vulnerability.  Reliance on the United States flowed from the continued recession in Japan and the heavy dependence of European nations on the United States' economy.  He had not seen much autonomous stimuli to growth in Europe.  The environment for developing countries was also rather poor, so those were not going to provide the major engine of growth.  Also, international trade had been particularly slow and would continue to be slow.  That would improve somewhat next year, however, with growth forecasted at 3 per cent in world exports.  But that was very low by historical standards, or at least, by those of the last decade and would not stimulate growth in developing countries. 

For those who depended on primary commodities, he saw a continued weakness in commodity prices.  So on the price front, developing countries would not get much of a stimulus.  Finally, the international financial markets were proving difficult for those nations.  Over the past year and into 2002, financial flows had been virtually stagnant and the cost of finance had increased.  So, developing countries were finding themselves in a very difficult international economic environment.  Two consecutive years of very slow growth and a very weak internationally environment was particularly bad for developing economies and economies in transition. 

He added that many of the regions in the developing world would have encountered what was called "negative growth", or a decline in per capita output in 2001.  He only foresaw a very modest recovery in 2002.  From the United Nations' perspective on development, that was a particularly bad situation in terms of the long-term goal of reducing poverty in those countries.  The fluctuations in the world economy had had a serious impact, including on the longer-term growth prospects of developing countries.  Those fluctuations reduced confidence and increased uncertainty, thereby damaging growth power.  In the short term, accommodative or stimulatory policies must be maintained in the developed countries in order to kick start the world economy and, wherever possible, allow developing countries to also apply more stimulatory policies.

Another key conclusion of the report was that the developing countries were heavily constrained in the extent to which they could react to the slowdown in their growth, he said.  They could not apply the same sort of measures that were applied in developed countries.  Fiscal policy was heavily constrained, since many of those countries already had ongoing budget deficits or difficulties, which were spillover from the Asian crisis.  Also, the slowdown of growth had aggravated that problem.  In some developing countries in Africa, for example, the fiscal situation was constrained by low commodity prices because government revenue also depended, to some extent, on commodity export revenue.  So, those countries were facing a difficult situation preventing them from using fiscal policy to stimulate their economies.

In more advanced countries that did not necessarily have programmes with the International Monetary Fund (IMF), the international financial markets now scrutinized fiscal deficits very carefully, as those presented risks to financial flows to those countries.  So, developing countries were very constrained in both their fiscal and monetary policies, again because of the present international environment and the ensuing scrutiny.  That had left little room to manoeuvre or use their monetary policy for stimulatory purposes.  The role of the United States was particularly important as a stimulus.

At the same time, there were some risks to recovery in the United States, he suggested.  It was not possible to forecast the shock to that country's economy of 11 September, but there was uncertainty associated with future political developments.  On the economic front, there were potential dangers in the United States, including the trade imbalance, which presented a potential risk; the low savings rate; and the high private sector debt.  Although the stock markets had recovered somewhat, there remained a danger of another collapse in the United States' equity market, which was still somewhat high.  Still, the world was relying heavily on the United States, although there were some risks in doing so.

He said the other big uncertainty was what would happen in international financial markets with respect to developing countries.  Concerning Argentina, the good news here was that the Argentine crisis had not spread through the financial markets.  One of the positive features of the last few years had been that financial markets had become more discerning, particularly among developing countries in crisis.  Financial confidence in neighbouring Brazil, for example, still remained relatively high.  At this stage, it was too difficult to foresee exactly what would happen in Argentina.

A correspondent asked whether Mr. Kinniburgh had been able to fully factor in the Argentine situation and which developing countries might have the hardest time recovering.

He said the situation was still full of uncertainties.  He still foresaw a slowdown there, but the encouraging news was that there had not been much “financial contagion”.  Also, the situation had not been totally unforeseen, although the specifics had been unclear.  Continued recession in Argentina, while noteworthy in the short term, would affect Brazil, in particular, and Latin America, in general.  All of that would depend on how that situation developed, particularly the exchange rate development. 

The people who had been hit the hardest by the international economic situation were essentially the East Asian countries and Latin America because of their ties to the United States, he said.  The bursting of the bubble had had a particularly dramatic impact on the East Asian countries through the slowdown in trade with the United States.  There would be some rebound, but even that recovery would be extremely limited.  African countries were affected most by commodity prices, although those appeared to be somewhat less affected than the other regions.  They were still struggling around that 3 per cent growth rate, which had been expected to finally pick up to more than 4 per cent.  A 3 per cent growth there was extremely low considering that the population was growing in the range of 2 per cent.  Latin America also suffered from commodity prices.

Concerning the deepening divide between rich and poor countries, he said that some of the positive developments in 2001 had been the increased attention to those issues.  Following 11 September, one positive outcome had been the decision to start a new set of trade negotiations.  International trade was one area in which those issues could be addressed, and it was extremely important to improve market access for developing countries, in general.  The other encouraging development last year concerned official development assistance (ODA) flows.  There had been signs of a bottoming out of ODA, or foreign aid, to developing countries, which had been decreasing throughout the 1990s.  With donor countries recognizing the effect on the world economy, flows of ODA would make "some sort of recovery", he said.

Asked about whether he thought consensus would be reached on a strong action programme at the forthcoming global Conference on Financing for Development, he said he was optimistic.  The Monterrey Conference would not be an end point, but rather a starting point or turning point in financing for development.  It might be difficult to reach absolute consensus on all issues on the table, but it might be possible to launch an international programme of work that would include the question of ODA and other aspects of global financial cooperation.  There would likely be several "side outcomes".  Many of those would not likely achieve consensus, but they would represent steps forward.

* *** *