PRESS CONFERENCE ON 2003 WORLD ECONOMIC PROSPECTS

Following a slower than expected start, the world economy was projected to pick up in the second half of 2003, Ian Kinniburgh, Director, Development Policy Analysis Division, Department of Economic and Social Affairs (DESA), told correspondents this morning as he presented the “World Economic Situation and Prospects 2003”.

The report, a joint product between DESA and the United Nations Conference on Trade and Development (UNCTAD), was a companion publication to the “World Economic and Social Survey” issued by the United Nations each year in July. 

The previously anticipated, vigorous recovery in the second part of 2002 had not materialized, Mr. Kinniburgh stated.  As a result, the world economy was projected to grow by 2.75 per cent in 2003, reduced from the figure of 3.75 forecasted last summer.  Slower growth was expected in 2003 in all major groups of countries than had previously been anticipated.

The developing world, he noted, had had two very poor years.  While it had experienced 6 per cent growth in 2000, that had fallen to 2 per cent in 2001 and was still under 3 per cent in 2002.  For 2003, the growth rate was expected to be about 4.75 per cent.  The slowdown in developing countries had occurred despite various reforms that they had undertaken.  Also, due to the slowdown in the developed countries in the past two years, developing countries had faced a rather unfavourable external economic environment.

In addition, trade and commodity prices had also declined in the past couple of years, he said.  Furthermore, private capital flows had diminished and foreign direct investment (FDI) flows to developing countries had declined, with the exception of China.  The notable exceptions in the slow growth in the developing world were the two large economies of China and India.

Looking ahead, he expected to see a slow global recovery, due to a slow recovery in the United States, as well as a number of other uncertainties.  Western Europe was doing more poorly than expected, due to similar reasons as in the United States.  The economies in transition had weathered the slowdown remarkably well and had even recovered some of the ground lost in the 1990s in the transition process, and would continue to do so in 2003.  Japan continued to be weak due to a number of reasons, including problems with its financial sector and high government debt.

In the developing world, he said, most of the regions would do slightly better in 2003, but still below the potential rates of growth seen in the mid and late 1990s.  Western Asia would continue to benefit from the higher oil prices currently prevailing.  In Africa, he anticipated some recovery in commodity prices and a slight improvement in trade.  In Latin America, some recovery from the decline in output seen in 2002 was expected. 

He emphasized that there were great uncertainties, including that the recovery itself was an uncertain process.  Another factor was the heavy dependence on the United States economy and the uncertainty about that economy. 

Also, there was the possibility of further conflict in Western Asia hanging over the world economy and its effects on overall economic confidence of investors and consumers, as well as the price of oil. 

Apart from those uncertainties, there were some specific risks in the world economy, he said.  The first one was the continuing difficulties faced by the financial sector in Japan.  The second was the continuing vulnerabilities present in certain developing countries, such as Argentina.  Additional risks were equity prices, which were somewhat overvalued in many developed countries and could further weaken economic confidence, as well as imbalances in the United States economy.

Asked what effect a war in Iraq would have on the world economy, Mr. Kinniburgh said that, while specific calculations had not been carried out, it was clear that an escalation of conflict in that area would only have damaging effects on the global economy.  It would almost certainly have an impact on the price of oil and further damaging effects on consumer and investor confidence.  Above all, it would create destruction and havoc within the region to both human life and physical capital.  That destruction of human and physical capital was a major setback to the global economy.

Mr. Kinniburgh was also asked what effect a $40 barrel of oil (a $10 increase from current prices) would have on economic growth.  He replied that, if that price was sustained for six months, it would reduce world growth rates by half a percentage point.

Responding to questions regarding the stimulus package recently presented by the United States administration, Mr. Kinniburgh said he had not had a chance to study it in great depth.  However, he felt that what was needed was a short-term stimulus, while at the same time maintaining fiscal balance.  In the current slow growth environment, some stimulus was appropriate.

Elaborating on the situation with economies in transition, he said that those countries had a difficult period in the early years of transition.  Clearly, economic reform had played a role in their rates of recovery.  They were becoming more integrated in the world economy and redirecting their trade patterns.  Also, the recent advent of oil exportation from the Commonwealth of Independent States countries had become an important source of growth.  Economies in transition were also now relying more heavily on domestic demands, which was providing growth for their economies.

Asked to comment on the countries of the Association of South-East Asian Nations (ASEAN), he said that they had provided one of the “bright spots” in the world economy.  They had suffered from the slowdown in 2001 due to their close links with the United States, but there had been some recovery.  As a result of inter-regional trade and linkages with China, growth in that region -– between

5 and 6 per cent -- had been one of the strong points in the global economy.  He expected that to continue.