World could face severe economic downturn, new UN report suggests

The deepening credit crisis in affluent countries triggered by the continuing housing slump, the declining value of the United States dollar, persisting global imbalances and soaring oil and commodity prices pose major threats to economic growth around the world, according to a report released today by United Nations economists.

The economists add that the unfolding global food crisis is not only a grave humanitarian issue but also a threat to political and social stability in some developing countries and may reverse some of the progress towards the Millennium Development Goals (MDGs).

Today’s report, issued by the UN’s Department of Social and Economic Affairs (DESA), predicts that world economic growth will fall steeply to 1.8 per cent this year and 2.1 per cent next year, down from 3.8 per cent in 2007.

The report says that much depends on developments in the US, which remains the prime driver of the global economy, and where a crashing housing market and finance and credit weaknesses set off the global downturn.

A worst-case scenario would see the “world economy come to a virtual standstill” if recent financial measures in the US fail to turn the economy around, and house prices continue to fall, blending with a severe tightening on credit.

To boost the global economy, the report calls for an internationally coordinated economic stimulus package to support US efforts, centred on the expansion of domestic demand in countries with savings surpluses – especially in Europe, the Arabian Gulf and East Asia.

To counteract inflation in food prices, the economists recommend improving supply and productivity through investment in irrigation techniques, infrastructure, improved seeds and fertilizer, and agricultural research and development. This would also help shore up rural economies where most of the world’s extreme poverty is located.

In addition to removing supply constraints on vital commodities, such as food, and to stimulating global demand, the report also says that deep reforms are needed in the mechanisms of international financial regulation and supervision if new problems are to be avoided.

The mid-year report is entitled “World Economic Situation and Prospects 2008.”