UN Chronicle | The State of the World: World Economic Situation and Prospects 2003

The State of the World
World Economic Situation and Prospects 2003
By Nuchhi R. Currier for the Chronicle

Web Article

The world shrinks as globalization's grip becomes firmer, and the results are at best mixed. Even as the movement of peoples and goods between regions increases, there are other influences that get transmigrated as well. Porous borders and contracting distances produce cross-cultural influences, which also extend to the economies of nations. This interdependence allows us to talk about the world economy as a single and homogenous entity.

According to the "World Economic Situation and Prospects 2003", a joint publication of the Department of Economic and Social Affairs and the United Nations Conference on Trade and Development, the world economy in 2002 had several commonly shared features by a majority of countries to varying degrees: sluggish growth of output, benign inflation (even deflation in some cases), stagnant employment, low interest rates, deteriorating fiscal balances, low and uneven growth in international trade, reduced international capital flows, depressed prices for many non-fuel commodities and depreciated equity prices.

By the end of 2002, the global economy was showing some signs of health. The recovery, however, has been sluggish and subject to uncertainties associated with geo-political tensions resulting in higher oil prices, lower business and consumer confidence, in addition to overcapacity, hesitant business capital spending, slow hiring of workers and lower equity prices. Additionally, the large external imbalances, fragility of the international financial system, as well as the domestic corporate sector in some countries, and other structural problems portend substantial vulnerability for the world economy in the medium term.

The increase in corporate scandals, particularly in the United States, worsening fiscal and external debt problems in several Latin American economies and severe floods and droughts in some countries further exacerbated previous weaknesses in the world economy, but were mitigated somewhat by key supportive factors such as monetary and fiscal policy stimuli in countries where they were possible, resilient consumer spending and inventory restocking. In today's more globalized constellation of production, trade and financing, capacity built in individual economies has become more dependent on aggregate demand worldwide. This applies in particular to the high-technology sector.

The gross world product (GWP) is estimated to have grown by 1.7 per cent in 2002, only marginally better than the previous year, which was the weakest in a decade. World trade, which had declined in 2001, recovered slightly with a 2 per cent increase. Only a handful of developing economies increased their per capita output by more than 3 per cent in the past two years. This anemic global growth is a result of two consecutive years of decline in per capita income for the world as a whole and is a major setback for the fulfillment of the Millennium Development Goal of reducing global poverty, and the slow pace is expected to continue into the first half of 2003. The expected rate of GWP growth is 2.75 per cent for the year, resulting in stagnant or worsening unemployment rates.

In order to improve the global economic situation, it is important to reduce overcapacity in developed economies, boost domestic demand and promote growth in developing countries where demand for high-technology products and services is potentially enormous. The United States remains the locomotive of global economic growth and thus has great impact on the economic performance of other countries. The only other major economy exerting influence and providing impetus to economies within its region is China.

Among the developed economies the United States recovery is expected to be anemic, while Japan and Western Europe continue to suffer from weak domestic demand resulting in tightly constrained and fragile economies. Australia, Canada and New Zealand have fared better. Economies in transition are showing strengthened domestic demand resulting from fiscal policy stimuli and the cumulative benefits of recent structural reforms. Entry into the European Union promises to provide some stimulus. Central and Eastern European economies are suffering from external deficits and fiscal constraints, while the Commonwealth of Independent States remain constrained by supply bottlenecks.

An economic rebound in Asian economies is expected to continue among the developing economies as long as the developed ones hold up. Latin American prospects remain unpromising following an outright decline in Gross Domestic Product in 2002. African countries are expected to grow by 4 per cent or higher, due mainly to stronger domestic factors, but many are not expected to show any tangible growth in per capita income. Most Western Asian oil-exporting economies will only experience a limited benefit from increasing oil prices.

The persistent loss of employment, as well as benign inflation, is contributing to the weakness of the global economic recovery, posing a long-term policy challenge and key hurdle to poverty reduction. In business cycle recoveries, the labour market normally lags the rebound of output. Thus unemployment reduction prospects are less than robust in most economies. Inflation remains tame throughout the global economy and, barring an oil shock, is predicted to remain benign for most economies.

Uncertainty and risk factors:

War in Western Asia, resulting in an oil-supply shock to the world economy;

Prolonged depression in equity markets;

Trade imbalances: sharp reversal of United States external deficit and devaluation of US dollar could send financial and real economic shocks to the rest of the world; and

Financial and fiscal fragility in developing countries could set off debt crises, which could have contagion effects on the weak global economy.

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World Economic Situation and Prospects 2003

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