According to a new UNCTAD report, Global Economic Trends and Prospects, the world economy was heading for recession this year, even prior to the events in the United States on 11 September. Back in April, the Trade and Development Report 2001 warned that "business as usual" was the wrong mantra for policy makers anywhere; it would be dangerously so now.
In the report, UNCTAD economists lend their support to an emerging consensus on the world economy:
- All the major industrial economies are heading in the wrong direction, with the United States economy likely to enter a technical recession.
- Contagion through trade and financial flows will seriously damage growth prospects in developing countries for the remainder of this year and next.
- The United States cannot and should not be left alone to shoulder responsibility for the global economy; Europe, in particular, has the room to expand.
- Coordinated global economic responses will be essential to bring about a strong and sustainable recovery.
Since 11 September, the danger that all three major economies will come close to, or enter, recession, has become a very real one. Consumer spending, that had been keeping the US economy out of recession, has been hit hard by the attacks and corporate earnings are likely to drop further. European confidence, which had been ebbing with the US slowdown over the summer, is vulnerable to any signs of labour market weakness. Japan already had negative growth in the 2nd quarter and that looks likely to be repeated this quarter.
The threat to developing countries of contagion from a sharp slowdown in industrial countries comes through weaker exports, worsening terms of trade and diminishing capital flows. All three trends have already set in but are now likely to intensify. Asian exporters look particularly vulnerable given their high exposure to the US market and many indebted Latin American economies are suffering both from lower commodity prices and reduced access to international financial markets. Growth rates in both regions this year are likely to be marked down sharply.
Much will now depend on whether industrial countries adopt a sufficiently expansionary stance and whether excessive disruption to international economic relations can be avoided. UNCTAD economists welcome the swift and coordinated response by monetary authorities to lower interest rates following the attacks and to ensure the smooth functioning of financial markets and clearance and settlement systems. The size of the fiscal stimulus in the United States, amounting to as much as 2% of GDP, also demonstrates the determination of policy makers there to turn the economy around.
There is much hope that the actions now being taken will bring a quick turnaround in the world economy beginning early next year. However, with the possibility that the US fiscal package may only offset the negative impact of the attacks, the Report argues that Japan and particularly Europe need to assume a much more expansionary policy stance if the global economy is to make a quick rebound. And even if this happens, with austerity and import retrenchment in developing countries already adding to the global downturn, UNCTAD sees a need for decisive multilateral responses in guiding the global economy through this difficult period:
- Additional international liquidity is needed to support pro-growth policies in developing countries; UNCTAD calls for the full mobilization of resources of the Bretton Woods institutions, including emergency and contingency financing mechanisms at the IMF.
- Increased lending by domestic export credit agencies should, where necessary, be given multilateral support to the extent that is possible within their legal mandates.
- Global mechanisms for the protection and support of distressed international debtors in the form of temporary standstill arrangements, lending into arrears and debt restructuring need to be quickly designed and implemented; in this regard, the recent remarks by Treasury Secretary O`Neill in support of an international bankruptcy law are consistent with a longstanding UNCTAD recommendation.
- Contingency measures with respect to the debt of affected developing countries, including debt write-offs and deferral of payments on official debt.
- Increased overseas assistance; UNCTAD endorses the recent call of the President of the World Bank for an additional $10 to $20b dollars a year in ODA.