World Economic

Situation and
Prospects 2009-
2010
May 2009

Rob Vos
United Nations

www.un.org/esa/policy
Main messages
1. Worst financial crisis since World War II
2. Global economy is in recession
• Synchronized downturn, no green shoots yet
• Rising unemployment
• Setbacks in progress to poverty reduction and other
MDGs

3. Downside risks of a prolonged global recession

4. Policy challenges:
• Further decisive and cooperative action is needed to
restore the financial health of banks
• Fiscal stimulus measures should be better coordinated
and aligned with global sustainable development
objectives
• Deeper reforms of the international financial architecture
should urgently be set in motion
• A new framework for global economic governance 2
 0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0

is easing somewhat…
Credit crunch in the US
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06

Spread of interbank lending, %

Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
…

Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
3
… but borrowing costs for
developing countries remain
elevated; private capital flows
are reversing
10
Africa
Asia
8 Latin America
Europe
6

0
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
4
World trade growth is
collapsing
12 10.9
9.2
7.7
8 6.6

4.1
Annual percentage change

4
2.4

0
2004 2005 2006 2007 2008 2009 2010

-4

-8

-12 -11.1
5
After a plunge, oil prices
are back to 2005 level
140

Nominal price
120
Real price

100
$ per barrel, monthly average

80

60

40

20

0
2002 2003 2004 2005 2006 2007 2008 2009
6
 still above historic levels
at lower levels, though
World food prices remain
Index, 2000 = 100

100

150

200

250

300

350

400

450

500
50
Jan2001

Jul2001

Wheat
Jan2002

Jul2002

Jan2003

Maize
Jul2003

Jan2004
Rice

Jul2004

Jan2005

Jul2005

Jan2006

Jul2006

Jan2007

Jul2007

Jan2008

Jul2008

Jan2009
7
World economy is in recession,
recovery is uncertain
5
4.0 3.9
4 3.9

3.5
3
Optimistic
2.7 2.1
2
1.6

0 Pessimistic
2003 2004 2005 2006 2007 2008 2009 2010
-1

-2
-2.6
-3

8
World income per capita is
declining in 2009
10

8
GDP per capita annual growth %

0
2004 2005 2006 2007 2008 2009 2010
-2

-4

-6

Developed countries Economies in transition Developing countries

9
60 developing countries will
see declining incomes in
2009
(number
70
of countries with declining per capita incomes)
60 Developed countries
60 Economies in transition
Developing countries
50

40
33
30
22
18
20 14
12 13
10
1 2
0
2008 2009 2010
10
Severe recession in
developed economies
8
6.1
6
4.0
4
GDP growth rate, %

2.4 2.7
2.0
2 1.5 1.5
1.1 1.0
0.4 0.7
0.0 -0.1
0
-0.6 -0.4
-2 -1.1
-1.7

-4 -3.5 -3.7

-6

-8 -7.1

USA Japan EU15 NewEU

2007 2008 2009 2010 Baseline 2010 Pessimistic scenario
11
Sharp contraction of economic
activity in the economies in
transition…… 10
8.5
8
6.2
6 5.4
GDP growth rate, %

4.2
4

2 1.5
1.0

0
-0.3 -0.6
-2
-1.9

-4

-6 -5.4

South-eastern Europe CIS

2007 2008 2009 2010 Baseline 2010 Pessimistic scenario
12
Developing countries are
being hit hard through trade
and finance channels
• Spill-over effects through financial markets are hitting
strongest on the middle-income countries
• All developing countries are affected through slowing
trade.
• Primary exporters are also seeing deterioration in
terms of trade
• Low-income, net food and oil-importers are seeing
improving terms of trade, but are suffering mainly
through reduced demand for exports
• Balance of payments constraints are emerging in
growing number of countries and vast reserves are
quickly evaporating
13
Leading to slowdown of
growth in all developing
countries
10 9.6
8.5
7.6
8
6.8
6.0 6.1
GDP growth rate, %

5.4 5.6 5.5

6 5.4
4.9
4.9
4.3 4.5
4.0 3.9 4.1 4.0
4 3.0 3.1 2.9
2 1.7 1.7
2 1.4
0.9

0
-0.7 -0.7
-1.1
-2 -1.8

-4
Developing Africa East Asia South Asia Western Latin
countries Asia America

2007 2008 2009 2010 Baseline 2010 Pessimistic scenario

14
3.Downside risks
• Deeper and prolonged crisis
(a)prolonged credit crunch in major
economies and deeper recession
(b)steep capital reversals in emerging
markets
(c)less ODA for low-income countries
• Global imbalances

15
 continues
The dollar volatility
105

120

135
90
Jan 04
Apr 04
Jul 04
Oct 04
Jan 05
Yen/US$

Apr 05
Jul 05
Oct 05
Jan 06
Euro/US$

Apr 06
Jul 06
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
0.60

0.70

0.80

0.90
16
…and global imbalances
persist, though narrowing in
deflationary spiral
600 United States

400

Japan
200
Billion US$

0
European Union
-200

-400
Developing
countries (excl
-600 China) and EiT

-800 China
2004 2005 2006 2007 2008 2009 17
4. Policy challenges (1)

• We have seen extraordinary

responses to deal with the crisis
– $18 trillion of public funding (30% of WGP)
allocated to financial sector
– $2.6 trillions fiscal stimulus (4% of WGP
spent over 2009-2011) planned, less than
the desired level of 2-3% of WGP annually
– Financial landscape has changed
– Coordinated monetary responses
18
4. Policy challenges (2)
• More and even bolder action is
needed:
– Decisive and cooperative action is
needed to restore the health of financial
sector.
– Align fiscal stimulus with global
sustainable development objectives
– Fundamental reforms of the international
financial system are needed to overcome
the systemic flaws
19

– A new framework for global economic