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World economy is ‘teetering on brink’ of downturn

The world economy is “teetering on the brink” of a severe downturn and will grow by only 1.8 per cent in 2008, the United Nations said in its midyear economic projections.

business Updated: May 16, 2008 23:07 IST

The world economy is “teetering on the brink” of a severe downturn and will grow by only 1.8 per cent in 2008, the United Nations said in its midyear economic projections. That’s down from a global growth rate of 3.8 per cent in 2007 and the downturn is expected to continue in 2009 with only slightly higher economic growth of 2.1 per cent, the UN report said on Thursday.

The midyear update of the UN World Economic Situation and Prospects 2008 blamed the downturn on further deterioration in the US housing and financial sectors in the first quarter which “is expected to continue to be a major drag for the world economy extending into 2009.” But the UN said developing countries won’t suffer as badly. They should grow by 5 per cent this year and 4.8 percent next year against a robust 7.3 per cent in 2007.

The UN economists said the deepening credit crisis in major market economies triggered by the US-led slump in house prices, the declining value of the dollar, persistent global imbalances, and soaring oil and commodity prices “all pose considerable risks to economic growth” in both developed and developing countries.

“The baseline forecast projects a pace for world economic growth of 1.8 per cent in 2008," the UN report said.

But it said the final figure will largely depend on developments in the United States.

Global growth this year could fall to 0.8 per cent if the US sub-prime mortgage market turmoil has a more serious impact on developing countries and countries in transition, the UN report said.

But if the monetary and fiscal measures the US government has take to stimulate the economy _ including tax refunds and lower interest rates _ boost consumer spending and restore confidence in the business and banking sector, the world economy would only slow to 2.8 per cent growth this year and 2.9 per cent in 2009, it said. The report, prepared by the UN Department of Economic and Social Affairs, forecast that US economic growth will decline from 2.2 per cent in 2007 to -0.2 per cent this year, with only slight recovery in 2009 to 0.2 per cent growth.

"At issue is how deep and long this contraction will be," the report said. "As the housing slump continues and the credit crisis deepens, a broad array of ... indicators are already hinting at a recession."