LINK GEO & United Nations World Economic Situation and Prospects Update May 2009 Rob Vos United Nations

2 Main messages 1.Severest crisis since Great Depression: World economy will shrink by 2.6% in 2009 Systemic crisis 2.Synchronized downturn Led by developed countries, but emerging economies and other developed countries hard hit Some see “ green shoots ”, but none signal recovery as yet Rising unemployment, setbacks in poverty reduction 3.Recovery in 2010 is possible, but downside risks of a prolonged global recession are still high 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

3 Credit crunch in the US is easing somewhat …

4 … but borrowing costs for developing countries remain elevated; private capital flows are reversing

5 World trade growth is collapsing

6 World economy is in recession, recovery is uncertain

7 Severe recession in developed economies

8 Sharp contraction of economic activity in the economies in transition …

9 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. Falling remittances are affecting many small developing economies Balance of payments constraints are emerging in growing number of countries and vast reserves are quickly evaporating

10 Leading to strong growth deceleration in all developing countries

11 60 developing countries will see declining incomes in 2009 (number of countries with declining per capita incomes)

12 Setbacks in poverty reduction Slowdown poverty reduction compared with pre-crisis growth Total73 – 103 million Africa12 – 16 million East and South Asia56 – 80 million Latin America and Caribbean ~ 4 million

13 3.Recovery possible in 2010, but downside risks are high Quick recovery only if –financial sector problems bottom out soon –fiscal stimulus gains traction soon –…but even then, recovery maybe feeble without enhanced, concerted countercyclical responses Deeper and prolonged crisis (a)Prolonged credit crunch in major economies and deeper recession (b)Global imbalances and risk of exchange instability (c)Continued steep capital reversals in emerging markets (d)Less ODA for low-income countries (e)Protectionist tendencies

14 The dollar volatility continues

15 … and global imbalances persist, though narrowing in deflationary spiral

16 We have seen extraordinary responses to deal with the crisis –$18 trillion of public funding (30% of WGP) allocated to financial sector –$2.7 trillion of fiscal stimulus (4% of WGP spent over ) planned, less than the desired level of 2-3% of WGP annually –Financial landscape has changed –Coordinated monetary responses 4. Policy challenges (1)

17 More and even bolder action is needed: –Decisive and cooperative action is needed to restore the health of financial sector. –Stronger, better coordinated fiscal stimulus, greater policy coherence: More balanced stimulus (stronger in surplus, weaker in deficit countries; facilitate countercyclical responses developing countries) Coherence with development financing policies Coherence with trade policies (no protectionism; enhanced access to markets for developing-country exports and Aid for Trade) Coherence with climate change and food security, and more broadly with global sustainable development objectives Coordination medium-term financing of stimulus and safeguards against major exchange rate misalignments 4. Policy challenges (2)

18 Global gains from improved policy coordination

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20 More and even bolder action is needed: –Outcomes remain uncertain, policies will need to be closely monitored and consulted with business community and society Fundamental reforms of the international financial system are needed to overcome the systemic flaws A new framework for global economic governance 4. Policy challenges (3)