Recession Looms

Analysis in the World Economic Situation and Prospects in 2009 calls for coordinated, massive and swift economic stimulus to counteract the global downturn.

The UN report, which was released Monday, Dec. 1, projects a decline next year of per capita income and falling export growth and capital inflows. Higher borrowing costs for developing countries are also expected as economic woes spread from the rich economies.

The report also said the US dollar is set to resume its decline, with the possibility of a hard landing in 2009.

"If the present credit squeeze prolongs and confidence in the financial sector is not restored in coming months, the developed countries could enter into a deep recession in 2009," the UN report said. "This would bring economic growth in developing countries down to 2.7 percent, dangerously low for their ability to sustain poverty reduction efforts and social and political stability."

Meager world output

The analysis was published to coincide with the International Financing and Development Conference, which ends Tuesday in Doha, Qatar. There the United Nations is set to demand deep reforms of the global financial system to prevent future financial crises.

The report projects a baseline scenario of world output in 2009 to reach 1 percent increase, compared to 2.5 percent growth in 2008 and 3.5 percent and 4 percent in the preceding years.

A more optimistic scenario projects that world output could reach higher than the baseline projection if governments would factor in 1.2 percent to 2 percent of gross domestic product into the stimulus efforts and declare further benchmark interest rate cuts in 2009.

Rob Vos, director of the United Nations Development Policy and Analysis Division and lead author of report, said devoting 2 percent of GDP to stimulating the economy could "be enough to stave off negative growth" and lead to recovery in 2010.

Institutionalized cooperation needed

UN economists said government responses to the crisis since October have taken on a more comprehensive and less piecemeal approach, which has led to increased international cooperation and coordination to repair the global economy.

Economists pointed out that about $4 trillion (3.1 trillion euros) worldwide has been injected into efforts to unfreeze the credit and money markets and that interest rate cuts have been implemented around the globe.

"But with consumer and business confidence seriously depressed and banks reluctant to lend, further lowering of interest rates by central banks will do little to stimulate credit supplies and private spending," they say.

The analysis says that China has already launched a fiscal stimulus package of $580 billion, or 15 percent of its GDP, to be implemented within two years. In the United States, the stimulus so far amounts to 1.1 percent of GDP in the first half of 2008.

"At present, however, there is no credible, institutionalized mechanism for international coordination of stimulus packages or monetary policies," the report said. "Such a mechanism will need to be created alongside other fundamental reforms."