U.N. predicts 2009 economic decline of 2.6 percent

Published 8:44 am Wednesday, May 27, 2009

UNITED NATIONS — The United Nations predicted today that the global economy will shrink 2.6 percent this year as a result of the world financial crisis — a considerably deeper downturn than the 0.5 percent contraction forecast in January.

In its midyear economic projections, the U.N. said developing countries have been disproportionately hard hit by the global economic crisis.

The crisis started in developed countries, but the U.N. report said developing nations have suffered most from capital outflows, rising borrowing costs, collapsing world trade, lower commodity prices and falling remittances from overseas workers.

On a slightly optimistic note, the U.N. report said that if current policy measures to stimulate economic growth take hold, a mild recovery could take place in 2010.

But the U.N. said a more prolonged global recession also is possible if financial destabilization is not reversed by concerted global policy actions.

The world economy grew an average of nearly 4 percent per year between 2004-2007 and 2.1 percent in 2008, the report said. But most countries across the globe are now deeply mired in the most severe financial and economic crisis since World War II.

Between September 2008 and May 2009, it said, the market capitalization of U.S. and European banks declined by 60 percent — or $2 trillion.

The report added that despite enormous write-downs and massive financial sector rescue operations by governments, banking problems have not gone away.

“If financial markets do not unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in most countries with the global economy stagnating … well into 2010,” the report said.

According to the U.N., world trade has declined dramatically since the end of 2008, falling in the first quarter of the year at an annual rate of more than 40 percent.

For 2009, the U.N. forecast that the volume of world trade will fall more than 11 percent, the largest decline since the financial crisis of the 1930s.

A rapid rise in unemployment has also taken place since 2008 and is expected to worsen in 2009-2010, the report said.

Initial projections of 50 million unemployed over the next two years could easily double if the situation continues to deteriorate, the U.N. warned.

“Lessons from past financial crises indicate that it typically takes four to five years for unemployment rates to return to pre-crisis levels after economic recovery has set in,” the report said.

According to the U.N. projections, world income per capita is expected to decline by 3.7 percent in 2007. At least 60 of the 107 developing countries for which the U.N. obtained data are expected to suffer declining per capita incomes, the U.N. said.

Only seven countries — down from 69 countries in 2007 and 51 in 2008 — will register per capita growth of 3 percent or higher this year. Growth of 3 percent is considered the minimum required to achieve significant reductions in poverty, it said.