World economy likely to shrink by 1% this year

Geneva: The world economy will shrink at least 1 per cent this year as hopes fade that some developing countries can withstand the crisis, the head of the United Nations Conference on Trade and Development said on Friday.

Unctad Secretary-General Supachai Panitchpakdi told Reuters the daily drumbeat of bad economic news on Friday that Thailand announced a record fall in exports and manufacturing in January meant no one really knows exactly how poorly the economy will shape up this year.

"We might see more compression on developing country growth and that of course results in a deeper worldwide contraction, so minus 1 [per cent] at the moment but it certainly could be deeper than minus 1," said Supachai, a former Thai deputy prime minister and director-general of the World Trade Organisation.

Unctad's working assumption of a 1 per cent contraction is based on projections of 2.5 to 2.6 per cent growth in developing countries, and is gloomier than the International Monetary Fund's 0.5 per cent global growth forecast in January.

That IMF projection assumed many developing countries, in Asia in particular, would get off lightly.

Supachai, who went to Asia after attending the meeting of the G7 industrial powers in Rome two weeks ago, said it now appeared Asian countries could suffer the same 30 to 40 per cent export declines that hit them in the Asian crisis a decade ago. This is because nations that adopted an export-oriented policy to get out of that crisis now find themselves exposed to slumping demand elsewhere in the world, leading many countries to question the value of the current open trading system.

Supachai said that to date, there were few signs of overt protectionism disrupting trade but he said many countries were adopting economic nationalism to promote their exports at the expense of others which were inhibiting normal trade flows.

"It is not the outright protections that you would see, it's not a blatant blockage of the market... for me it's the economic nationalism, the way that quietly, tacitly, countries are urging people to become more self-sufficient," he said.

Self-sufficiency is not always bad, but if everyone does it trade flows will contract and the world will be poorer, he said.

Supachai appeared to be referring to "buy local" campaigns, not just the controversial "Buy American" provisions in the US stimulus package, but similar moves elsewhere.

Another form of economic nationalism is currency manipulation where exchange rates are pushed down to help exports. Supachai said such beggar-thy-neighbour policies would not work if the overall market was contracting.

He declined to identify countries practising this, but China has long been accused by US critics of keeping its currency artificially low and the recent drop in sterling has angered Britain's trading partners.

Supachai said the April G20 summit of rich and emerging countries in London needs to agree a clear exit strategy for national stakes in banks.