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French Version

UN Report: Global economy forecast after 11 September

The world economy is currently growing at its slowest pace in a decade.

The world economy is currently growing at its slowest pace in a decade. A number of economies are contracting, while several others are on the verge of doing so. The economic shock resulting from the 11 September attacks exacerbated the gloomy outlook.

The growth of world gross product (GWP) is expected to be only 1.4 percent for 2001, with only a partial recovery to 2 percent in 2002. The volume of international trade is expected to register virtually zero in 2001, but to increase by 4-5 percent next year.

Lower corporate profits in the ICT (Information and Communications Technology) sector, has led to cuts in capital spending, the shedding of labor and a weakening of equity prices. Manufacturing output in many developed economies and in several developing economies was lower than one year previously.

The economic slowdown in developed countries increasingly affected developing countries in 2001. The size of the shock depended on the share of a country's trade with the US. East Asian countries were therefore particularly adversely affected. Countries in Latin America, particularly those with strong trading ties to the United States, were also among those most negatively impacted. It is impossible to assess the full economic implications of the attacks for the prospects of the global economy, but an assessment of the consequences can be derived by examining a number of dimensions of the issue. The most direct economic impact of the incident is the destruction of human and physical capital, including the losses of intellectual capital and infrastructure. If the current military campaign escalates, destruction will likely increase and more economies will be involved.

A second consequence of the events is the disruption of economic activities. The attacks in the US already directly disrupted many economic sectors worldwide. Airlines, insurance companies, travel agencies and financial traders have been those most affected, but the damage is spilling over to more and more sectors, such as manufacturing, retailing and technology. Hundreds of companies in the United States have lowered their estimates of earnings by a further 10 percent for both the third and fourth quarters of 2001 because of the consequences of the attack. The magnitude of the impact from this disruption is greater than that from the destruction itself. Even before the attacks, business sentiments in many economies had long been depressed and consumer confidence was also weakening.

The large declines in almost all equity markets in the aftermath of the incident have indirectly confirmed a broad and sharp decrease in confidence worldwide. This shift in confidence was caused not only by the one-time psychological shock of the attacks, but also by a sudden escalation of uncertainties about future actions and reactions.

The nervousness and apprehension of investors and consumers may lead not only to depressed demand in the short to medium run, but also to reduced expansion of supply capacity and lower potential long-term growth. In this sense, the impact on confidence is more significant than the damage from the destruction and disruption. Stabilizing and then boosting confidence should therefore be the focus of post-attack economic policies and should also be taken into account in the military and political campaign. A fourth consequence of the incident has been a noticeable shift in macro-economic policies in major economies, with monetary policy becoming more accommodative and fiscal policy more expansionary. In the week immediately after the incident, more than a dozen major central banks conducted an unprecedented, concerted easing of monetary policy, led by a reduction of 50 basis points in interest rates by the US Federal Reserve. Most central banks had been easing monetary policy to varying degrees. While the European Central Bank (ECB) had been more conservative about this, the incident caused it to immediately reduce its rate by 50 basis points.

Along with the unfolding military actions, defense spending in the US is expected to increase substantially in the coming years. The $40 billion emergency package alone, for example, if spent in the fourth quarter of 2001, could raise GDP by more than one percentage point, even without taking into account the effect of the increased spending from the private sector that will be induced. Fiscal policy in many other economies has also been expansionary, taking the form of various tax cuts. These have been supportive of household consumption, but less effective in stimulating business investment spending. Although both monetary and fiscal policies are becoming more stimulative, there are some caveats to their present effectiveness. The overall effects of expansionary fiscal policy in the longer run are also questionable, particularly because of the crowding-out effects on private investment and the consequences for productivity growth. Fifthly, the military and policy responses to the attacks will have a long-term impact on the allocation of resources, both within economies directly involved and worldwide. The long-run growth rate of the world economy, including the US, will be adversely affected. This can be seen as a reversal of the gains from the "peace dividend" of the 1990s, when the end of the Cold War led to reduced military spending in major economies.

International trade has been the main channel for transmitting the economic weakness across countries, although there have also been some international financial repercussions, including contagion in the deterioration in equity markets. World trade in services, particularly tourism and transportation which have been sources of growth in recent years, is likely to decline because of the attacks. Since the 1997 Asian financial crisis, private capital flows had been stagnating at a level much lower than the pre-crisis peaks, although foreign direct investment (FDI) had remained relatively stable. FDI was expected to drop substantially in 2001. In Third World countries the cost of external financing had become very high because of their domestic financial predicaments. The decline in private flows is likely to be offset to some extent by an increase in official flows. Oil prices have stayed within the OPEC target range of $22-28 per barrel for most of 2001. The US attacks caused prices to rise immediately to $29 pb, but declined to $23 in the following week. In foreign exchange markets, the attacks may have triggered a turning point between the US dollar and other major currencies. For many international investors, the attacks may have changed both the image of the United States as a "safe-haven" and their underlying optimism about the US economy. If the dollar falls precipitously, the deflationary impact on the global economy could be substantial. The worse-than-expected downturn in the US remains the central force behind the global slowdown. In Japan, GDP is likely to decline by more than 0.5 percent in 2001. Policy actions are to address some of the structural problems, such as the banking crisis and the weaknesses in public finance. Growth in western Europe is expected to be about one point lower than previously forecast. Germany and Italy have proved highly susceptible to swings in world demand and have suffered not only the direct consequences of the slowdown in the US itself but also the secondary effects of reduced import demand from slowing developing countries.

Growth in Europe decelerated substantially in the second quarter of 2001, mostly because of a decline in exports and, to a lesser extent, investment. The recent monetary easing by ECB should provide some support for a recovery of growth in 2002. Developing countries, on the other hand, are becoming increasingly engulfed in the global economic slowdown. Unemployment and poverty will inevitably and immediately rise in many countries, and the setback will also damage long-term development prospects.

A few Asian economies are already in recession. China has so far been less affected by the global downturn and is forecast to grow by 7.5 percent in 2001. Growth in India is expected to slow to about 4.5 percent.

In Africa, the weakening of commodity prices resulting from the slowdown are having negative consequences for many economies in the region. Economic growth in some African countries is likely to be less than expected in 2001 due to political unrest or other domestic events. The economic outlook for a few Central Asian economies, as well as other individual countries in south and west Asia, will be altered significantly, but in varying ways.

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