World Economic Situation and Prospects 2008 asdf United Nations New York, 2008 Th is report is a joint product of the Department of Economic and Social Aff airs (DESA), the United Nations Conference on Trade and Development (UNCTAD) and the fi ve United Nations regional commissions (Economic Commission for Africa (ECA), Economic Commission for Europe (ECE), Economic Commission for Latin America and the Caribbean (ECLAC), Economic and Social Commission for Asia and the Pacifi c (ESCAP), and Economic and Social Commission for Western Asia (ESCWA)). It provides an overview of recent global economic performance and short-term prospects for the world economy and of some key global economic policy and development issues. One of its purposes is to serve as a point of reference for discussions on economic, social and related issues taking place in various United Nations entities in 2008. For further information, please contact: In New York In Geneva Mr. Sha Zukang Mr. Supachai Panitchpakdi Under-Secretary-General Secretary-General Department of Economic United Nations Conference on and Social Aff airs Trade and Development Room DC2-2320 Palais des Nations, Room E-9050 United Nations, New York 10017, U.S.A. 1211 Geneva 10, Switzerland Phone: (212) 963-5958 Phone: (41) (22) 917-5806/5634 Fax: (212) 963-1010 Fax: (41) (22) 917-0465 E-mail: [email protected] E-mail: [email protected] iii Executive Summary The global outlook The world economy facing uncertain times After several years of robust growth, the world economy is now facing some serious chal- lenges in sustaining its brisk pace. Th e end of the housing bubble in the United States of America, as well as the unfolding credit crisis, the decline of the United States dollar vis- à-vis other major currencies, the persistence of large global imbalances and high oil prices will all threaten the sustainability of global economic growth in the coming years. Slower, but nonetheless robust, global economic growth in 2008 Th e growth of the world economy moderated somewhat from 3.9 per cent in 2006 to a nonetheless robust 3.7 per cent during 2007. Th e baseline forecast of the United Nations for 2008 is for growth of the world economy to slow further to 3.4 per cent, but the dark- ening clouds of downside risks are looming much larger than a year ago. Slower growth of the United States economy the main drag for the world economy Th e major drag on the world economy is coming from a slowdown in the United States, driven by the slump in the housing sector. Th e ongoing housing downturn in the United States became much more serious in the third quarter of 2007 with the sub-prime mort- gage meltdown, which triggered a full-scale credit crunch that reverberated throughout the global fi nancial system. Central banks of the major economies have adopted various measures to attenuate the fi nancial distress, but these measures did not address the more fundamental problems rooted in the unregulated workings of the global fi nancial system and its links with the world economy. Signifi cant spillover eff ects of the fi nancial turmoil originating in the sub- prime mortgage markets in the United States have been found in major European econo- mies and, to a lesser extent, in Japan and other developed countries. Th e growth prospects of these economies in 2008 have been downgraded also, confi rming that the growth of the other major developed economies is still not strong enough to replace the United States as the main engine of global growth. Continued robust growth in most developing countries Economic growth in developing countries remained robust at 6.9 per cent in 2007. Growth accelerated among the economies in transition to 8.0 per cent as a result of buoyant com- modity prices and strong domestic demand. Most developing countries and economies in transition have felt the eff ects of the global fi nancial turmoil, mainly through increased volatility in their local equity markets and a measurable widening of the yield spreads on their external debts, but neither eff ect appears to have been long lasting. Th e relative resilience of these economies is partly due to their improved macroeconomic conditions and their large accumulation of foreign iv World Economic Situation and Prospects 2008 World economic growth expected to slow down in 2008 Annual percentage change 14 12 World trade 10 8 6 4 World output 2 0 -2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007a 2008b Growth in developing countries and economies in transition weakening but still robust 10 Annual percentage change 8 6 4 2 0 Developed Economies in Developing Least developed economies transition economies countries Growth in Africa accelerating, slower growth in other developing regions Annual percentage change 12 10 8 6 4 2 0 East Asia South Asia Latin America (excluding (excluding and the Africa China) India) Caribbean Western Asia China India 2006 2007a 2008b Sources: UN/DESA and Project LINK. a Partly estimated. b Forecast. Executive Summary v exchange reserves, along with vigorous growth over the past few years. Part of that strength can also be traced to their growing interdependence, driven by the sustained, rapid growth in the two most populous emerging economies, China and India. Nevertheless, the growth in most of these economies has been far from self-sustaining and remains highly dependent on the wider international economic environment, which in turn is largely determined by the economic policies and performance of the major developed countries. Remarkably, economic growth in Africa strengthened in 2007, and that mo- mentum is expected to be maintained in 2008 at a pace above 6 per cent. Furthermore, the performance of the least developed countries (LDCs) remained strong on average, despite slowing somewhat in 2007 compared with 2006. In 2008, the poorest countries are again expected to post an almost 7 per cent growth. Th is good performance of the LDCs as a group obscures important diff erences across countries, with several countries performing poorly as a consequence of adverse weather conditions, terms-of-trade shocks and/or con- tinued civil strife. Th e countries also remain highly vulnerable to a possible downturn of the global economy. In the outlook for 2008, economic growth in most developing countries and the economies in transition will likely moderate, albeit with considerable variance. Some improvement in employment conditions, but high unemployment remaining in many developing countries Amidst robust economic growth, the employment situation continued to improve in 2006 and 2007 in a large number of economies. In the developed and transition economies, as well as in a number of developing countries, strong employment growth led to declining unemployment rates and has in many instances put upward pressure on wages. Many developing economies, however, witnessed only small employment gains despite robust output growth. In Africa, unemployment and underemployment rates remain especially high as labour-force increases continued to outstrip limited employment creation. In the outlook, it is expected that employment growth will retreat or remain modest in most economies in 2008 as a result of slower overall economic growth. Infl ation not expected to escalate Despite upward pressures from higher energy and food prices, worldwide infl ation remains low and is expected to recede from the peak levels registered for the decade in 2006. Th e global trend is dominated by the deceleration of infl ation in the developed countries in the second half of 2007 to an estimated 1.9 per cent for the year, with a further deceleration to 1.7 per cent expected for 2008. Infl ation in the United States is expected to drop below 2 per cent in 2008 on the heels of the slowdown in the economy, and is expected to remain low in Europe, at 2 per cent. Th e appreciation of the European currencies is mitigating the infl ationary pressures from higher world market prices for energy and food. Th e economies in transition are also expected to see a visible deceleration of infl ation in 2008. Infl ation in developing economies accelerated in 2007 to 5.6 per cent, up from 5.0 per cent in 2006. Higher energy and food prices have generally pushed the aggregate price level up, and diff er- ences in their weight in consumer baskets explain, to an important extent, the divergences in infl ationary trends among developing countries. More expensive energy and food explain for a good part substantially higher infl ation in the LDCs. Th eir impact is expected to taper off as the global economy slows and world commodity prices weaken somewhat. Consumer price infl ation is expected to decelerate to 5.4 per cent on average for the developing world. vi World Economic Situation and Prospects 2008 Worldwide inflation remains low, except in the least developed countries CPI, annual percentage change 2006 20 2007a 2008b 16 12 8 4 Sources: UN/DESA and Project LINK. 0 a Partly estimated. Developed Economies in Developing Least developed b Forecast. economies transition economies countries Uncertainties and downside risks Th e fi nancial turmoil during the third quarter of 2007 has once more signalled downside risks for the global outlook. Not only did this reveal the lack of adequate supervision and regulation of domestic fi nancial markets, it also signalled the increased threat of contagion in increasingly integrated, but also less transparent, international markets. In addition, the turmoil has again turned the spotlight on the problem of global macroeconomic imbal- ances. Th e main risks originate in the United States, where a deeper and longer slump in the housing market and a hard landing of the value of the United States dollar could trigger a worldwide recession and a disorderly adjustment of the global imbalances.