World economic growth could slow to 1 percent to 1.5 percent next year, about half of the projected 2.9 percent growth for this year, the UN trade and development body’s chief economist said on Thursday.
In its latest annual report, the UN Conference on Trade and Development (UNCTAD) assessed that in the middle of this year, the global economy was already “teetering on the brink of recession” because of financial market turmoil, commodity price hikes and huge exchange-rate swings.
But the UN agency also warned against over-estimating the problem of inflation, saying that the use of interest rate hikes to fight inflation could be counter-productive.
Rather, it called for wage restraint to prevent spiraling costs and for greater coordination among central banks on interest rate decisions.
The UN agency saw this year’s world output growth slowing by 1 percent compared with a year ago, with UNCTAD Secretary-General Supachai Panitchpakdi warning: “It might go even lower if the situation worsens in the second half of this year.”
For next year, UNCTAD chief economist Heiner Flassbeck said: “If you want my best guess, then indeed the world is going down from 2.9 percent in 2008” and would be closer to 1 percent to 1.5 percent.
The report said “the financial turmoil, the commodity price hikes and the huge exchange-rate swings are having an enormous impact on the global economy and are casting a shadow on the outlook for 2009.”
But as countries sought to deal with rising prices, UNCTAD warned against over-estimating the risk of inflation, as using interest rate hikes to rein in inflation could bring about a more rapid economic slowdown.
“Possible restrictive monetary policy responses to increasing pressure on the overall price index from higher commodity prices could well lead to a further deceleration of growth in developed and developing countries alike,” it said.
Instead, it called for other macroeconomic policies — such as wage restraints — to prevent spiraling costs.
It criticized the European Central Bank’s (ECB) quarter-point interest rate hike in July to 4.25 percent, saying that it could “negatively affect economic growth in the euro area and beyond.”
“Although rising commodity prices have lifted general price levels, most developed economies and many developing and transition economies do not yet face the threat of uncontrollable inflation,” it said.
It also asked central banks to coordinate their responses, saying that current divergent policies would only lead to greater risks of further speculation in the forex market.
Unlike the ECB, the US has been aggressively cutting interest rates.
Countries whose currencies are vulnerable to carry trade have also hiked interest rates to defend their exchange rates, UNCTAD said. Traders engaging in carry trade buy currencies with low-interest rates to convert them into investments fetching higher interest rates.
“These divergent policies may invite new speculation in foreign-exchange markets instead of calming the system,” UNCTAD said.
UNCTAD also had sharp words for the financial system, saying that such a system that throws up a crisis every three years must be “deeply flawed.”
“The recent crisis has shown once again that market discipline alone is ineffective in preventing recurrent episodes of ‘irrational exubuerance’ and that the market cannot cope with massive drops in financial asset prices,” it said.
On Sunday, the Bank for International Settlements (BIS) said the credit crisis had forced financial firms to write down US$503 billion in assets, but more losses could yet come in months ahead.
The notion that rapidly growing emerging markets were less reliant on developed markets has also been put to the test in recent months, particularly for countries that drew large investments from advanced economies, BIS said.
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