PRESS CONFERENCE ON MIDYEAR UPDATE OF WORLD ECONOMIC SITUATION, PROSPECTS
A midyear review of the world economic situation showed that while the global economic outlook was quite positive, large uncertainties surrounded it, Rob Vos, the Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), told correspondents at a Headquarters press conference today.
Launching the midyear update of the 2007 World Economic Situation and Prospects report, he said those uncertainties included a weak United States housing market and global imbalances.
In terms of the United States housing sector, he noted that a recession in the housing sector had continued in 2007, with a slowdown in activity and a large number of unsold homes. While house prices had not fallen, that might happen in the months and years to come if the recession continued as expected. A decline in prices would affect the domestic market, particularly household consumption in the United States, resulting in the risk of a serious recession in its economy, slowing growth from 2.1 per cent to 0.5 per cent in 2007 and 2008. That would then significantly slow the world economy and transmit the recession into the rest of the world. There had also been problems in the United States subprime mortgage market, which showed the risk of a spill over from the housing to financial markets.
Global imbalances were projected to stabilize in 2007 and 2008, but were still very large, he said. The United States deficit had increased to $860 billion at the end of 2006, and was expected to fall to $800 billion in 2007. That deficit was basically being financed by surpluses in the developing and oil exporting countries, as well as some major developed countries, in particular Japan and Germany. The European Union,at large, was projected to continue to have a slight deficit on its current account.
United States debt, which had now deepened to well over $3 trillion, might turn out to be unsustainable in the rest of 2007 or next, putting further downward pressure on the United States dollar, he said. Since its peak in 2002, the dollar had depreciated vis-à-vis the major currencies by some 35 per cent and by 25 per cent against a broader range of other currencies.
With that increased debt the risk of a sharp depreciation of the dollar continued, he said. If countries willing to invest in United States dollar assets expected further depreciation, they might be less willing to hold dollar assets, triggering a much sharper fall in the United States dollar. The risk of disorderly adjustment and the steep fall of the dollar existed. The policy challenge was how to prevent a hard landing of the United States dollar and forge a benign adjustment of the global imbalance.
Continuing, he said the current tendency in macroeconomic policy was not all in the right direction, particularly in the surplus countries where there had been a tightening of monetary and fiscal policies, particularly in Germany and Japan, making it more difficult for the United States to lower its external deficits by export growth. The United States would also need to adopt some contractionary policies to slow down its deficit. Another way to compensate without a major recession in the world economy was for the surplus countries to make more expansionary adjustments in their economies. The more expansionary fiscal policies of some Asian countries seemed to be insufficient to compensate for the possible deflationary effects of an adjustment in the United States.
The report called, therefore, for a coordinated strategy that would think about how to adjust global imbalances while avoiding recessionary tendencies in the global economy, he said. International policy coordination could take place outside of the mediation of the International Monetary Fund, provided that the Fund pushed ahead with its reforms and enhanced representation of the votes and voices of its members.
Providing an overview of the global economy, he explained that the world economy had decelerated from 4 per cent in 2006 to 3.4 per cent in 2007 and was expected to stabilize at 3.6 per cent in 2008. While still robust by historic standards, there had been a slight slowdown in the global economy in all country groups.
While the growth of the developing countries and economies in transition remained robust, there had also been a slowdown, he said. China and India remained dynamic, keeping growth rates up. Some accounts, including a report of the International Monetary Fund, anticipated a decoupling of growth between the United States economy and that of developing countries. He did not see much of that, however. A strong link still existed between growth in the United States and what happened in the rest of the world.
He noted that the major slowdown in the global economy had been in the United States economy from 3.3 per cent in 2006 to 2.1 per cent in 2007. That weakness was mainly due to the weak housing sector. Overall activity in that sector was down by some 20 per cent. While business investments in the United States had been very weak, a recovery was expected in 2008, pulling up the growth rate projections for 2008. That recovery, however, might be uncertain for a number of reasons.
Japan’s growth remained robust, he added. Its economy was expected to expand by 2.1 per cent in 2007 and slow to 1.9 per cent in 2008, basically because of having reached growth capacity. The outlook in Western Europe was for mild deceleration in 2007-2008, but growth rates would remain above the trends of the past years. Strong growth momentum had been maintained among the new members of European Union.
While there had been a noticeable slowdown among developing countries, growth remained very robust, he said. The good news continued to come from Africa, where growth was expected to remain up at 6 per cent per year in 2007 and 2008, as a result of strong commodity prices, rising mining and hydrocarbon outputs, strong public consumption and increased investment in infrastructure.
Growth in East Asia had accelerated to over 8 per cent in 2006, but there would be some moderation in 2007 and 2008, he said. China had again exceeded expectations in 2006 with 10.7 per cent growth. Other countries in the region had experienced acceleration in 2006. There would, however, be some slowdown in the region in 2007. Growth for China was expected to slow to 10.1 per cent, which was still very high, and slightly below 10 per cent in 2008. Growth in South Asia remained strong in 2006. Growth in India would slow to 8.5 per cent after reaching 9 per cent in 2006.
Growth in Western Asia and Latin America had continued to be stronger than in the past, he said. Despite the decline of oil revenues, the oil-exporting economies in Western Asia would still reach a growth rate of 5.1 per cent in 2007 and 4.9 per cent in 2008. Growth had been stronger than expected in Latin American in 2006, he added.
Turning to the least developed countries, he said growth had been strong on average, but varied among those countries, with strong growth being recorded in the oil exporting countries, including Angola and Equatorial Guinea. Some non-oil economies had performed well, with a strong expansion of public consumption and infrastructure. Several countries had recovered from political conflict and had undergone political and economic reforms. Others had received increased aid, boosting growth rates in such countries as Madagascar, Senegal, United Republic of Tanzania and Zambia. The political situations in other countries had been less favourable, and social tensions continued to limit growth, including in Haiti, Chad and Guinea. “That’s good news, but there is quite a bit of variety among the performance of these countries, particularly among the African countries,” he said.
The robust growth of the world economy was also built on a strong performance in trade, he said. World trade had grown at almost 10 per cent in 2006 and was expected to moderate to some 7 per cent in 2007 and 2008. That was still twice as much as the growth of world output, which meant that the ongoing globalization process continued with world trade increasing as a share of total output.
Trade among the developing countries had been strong, he added. Exports from China and India had increased by more than 20 per cent in terms of volume. Many other countries in Africa and Latin America had had very strong export growth in the double digit range.
Commodity prices remained robust, but seemed to have peaked, he said. Oil prices had reached an unprecedented high of a yearly average of $65 per barrel in 2006, peaking at $80 per barrel in the middle of the year and slowing down to $60 per barrel at the end of the year. Oil prices were expected to remain at $60 in 2007, which would represent a drop of some 8 per cent, and were expected to rise in 2008.
He said metal prices had increased by some 50 per cent in 2006, particularly on strong demand from China and the recovery in Japan and Europe. Some metal prices were expected to slide, moderating in 2007 and 2008. Prices of agricultural commodity prices were a bit diverse in terms of performance. Some products had a stronger performance, particularly corn in the United States, as many farmers had switched from soy beans to maize given the demand for maize for use as biofuel. Other food prices, however, had been on the decline. A diverging pattern was expected in 2007 and 2008.
Financial conditions for developing countries remained favourable, he said. The persistent current account deficit in the United States would likely induce higher benchmark interest rates, pushing up yield spreads for developing country lending.
Favourable conditions had kept up capital flows, although they were expected to be slightly lower in 2007 compared to 2006. Foreign direct investment had continued to increase, but was concentrated in a handful of developing countries. Official development assistance had declined to $103 billion in 2006, which represented a decline in real terms of some 5 per cent from 2005, he said.
The net outward transfer of financial resources from developing countries to developed countries at the end 2006 had reached $658 billion from developing countries and another $125 billion from countries with economies in transition. That trend had been continuing for decades, which raised the question of sustainability. Africa was now showing a negative net transfer of $95 billion for the continent as a whole and $10 billion for sub-Saharan Africa, excluding Nigeria and South Africa.
Responding to questions, he said the outlook for the price of oil was uncertain and depended on geopolitical factors. The market was quite tight, and supply constraints were strong. Any further shift in demand would keep the price of oil up. He expected the price to stay up for that reason. Oil prices could also be volatile because of shocks in the Middle East.
Regarding inflation, he said he saw inflationary pressures in some countries. He was not too worried about inflationary pressures in Europe, however. Inflation was still quite low. He did, however, see emerging inflationary pressure in India. While oil prices were pushing up inflationary pressures in some countries, on average they were quite low.
Asked about the “meltdown” in the United States subprime market, he said he had not seen a spill over of the problem, which had basically been contained.
Regarding differences between DESA’s research and that of the International Monetary Fund, he said the difference was mainly in method and focus. DESA’s focus was on developing countries. It tried to give as broad a picture as possible.
Asked what impact China had on the developing world and the United States economy, he said the United States economy still dominated the global economy.
“If the United States sneezes, it creates a flu elsewhere,” he said. That was still the case. China was, however, having a growing impact on the global economy. China was an important and growing factor in world economic growth, but still not the main factor driving the global economy’s overall outlook.