Global economy to shrink; deflation greatest threat, says UN

The deepening global recession means that the world economy as a whole could shrink next year and will battle to avoid destructive Thirties-style deflation, the United Nations said yesterday.

The UN alert over what threatens to be the worst year for the global economy since the Second World War came as fears of deflation were stoked when US producer price inflation slid into negative territory, registering an annual fall of 1.5 per cent last month.

In a bleak assessment of world prospects, the UN said that the global economy was now deteriorating at such a pace that its main projections in yesterday’s grim report were already out of date.

Rather than its main published forecast for world growth this year of a meagre 1 per cent, the UN said that its more pessimistic scenario of zero growth, or outright global decline by 0.4 per cent, was now more realistic.

Heiner Flassbeck, director of globalisation and development strategies at the UN Conference on Trade and Development (Unctad), said: “There is nothing unfortunately at the moment where we can say ‘this is positive’ or ‘this is giving a positive stimulus’ . . . For the world as a whole, the outcome could be zero, or even slightly below zero [growth]. I do not say this will go on for ever, but the coming months will get extremely tough.”

Mr Flassbeck said that the greatest threat now came from deflation of the sort suffered during the Great Depression, when falls in wages of 10 to 15 per cent in some economies triggered a drastic slump in consumer demand and brought world growth to a virtual standstill.

With official interest rates across the West tumbling towards zero, the UN issued a call for coordinated fiscal stimulus packages in countries around the world, such as that being planned by the incoming Obama Administration in the US.

The European Central Bank yesterday stepped up its efforts to combat the eurozone recession, cutting interest rates by a further half-point to 2 per cent, equalling previous record lows for the single currency era. The ECB has now cut rates by 2.25 percentage points since October.

Jean-Claude Trichet, the ECB president, signalled that the bank was set to cut eurozone rates still further, but indicated that the next move would probably come in March. “We didn’t say that it was now the limit and we would not move any more,” he said.

Anxieties over deflation taking hold were multiplied, meanwhile, by yesterday’s US producer prices figures. The cost of goods leaving factories fell for a fifth month in a row, dropping by 1.9 per cent, or 1.5 per cent down on a year earlier.

Headline US inflation, for consumer prices, is also widely tipped to turn negative in further official figures today.

However, these trends still fall short of full-blown deflation of the destructive sort suffered in the Thirties, since they are so far driven almost entirely by the rapid reversal of the past surge in oil prices. These have now plummeted from record highs above $140 a barrel in July last year to reach levels yesterday just above $35.

So-called “core” US inflationary pressures, which strip out food and energy costs, remain far higher than headline inflation. Core producer price inflation in December climbed to an annual 4.3 per cent rate in yesterday’s figures, for example.

— The Russian rouble sank to historic lows against the dollar and euro yesterday as a growing threat of recession forced Moscow to further devalue the currency.

After the Russian central bank widened the rouble’s permitted trading band for the fourth time in recent months, the currency fell to its lowest levels against the dollar since Russia opened up its economy in the Nineties, allowing the dollar to climb to 32.35 roubles. The euro also hit a record high of 42.55 roubles.

The move came with the once-booming Russian economy sliding as demand for its oil and gas slumps.

[Source: Times, London, UK, 16Jan09]

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