MercoPress. South Atlantic News Agency

Rich countries slowdown threatens emerging economies

While developing countries' economies are forecasted to expand by 6% this year that growth could potentially be checked by the slowdown in wealthier nations, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).

Financial turmoil, soaring oil prices and likely tighter monetary policy in several nations augur poorly for the global economy both in 2008 and 2009, with the reach of the sub-prime mortgage crisis extending well beyond the United States which has contracted liquidity and credit worldwide. UNCTAD's Trade and Development report for 2008 noted that output around the world is expected to grow by 3% this year, down nearly one percentage point from last year. In developed countries, gross domestic product growth could shrink to half this rate. "By contrast, growth in developing countries as a group can be expected to remain quite robust, at more than 6%, as a result of the relatively stable dynamics of domestic demand in a number of large developing economies," the publication said. "However, 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." To allow poorer nations to sustain their economic expansion, greater investment in "productive capacity" – the ability to diversify manufacturing – is needed to augment their reliance on primary commodities, UNCTAD said. Challenging theories that call for investment in developing countries to be drawn from mainly household savings and foreign capital, the report urges changes in domestic monetary policy and local financial systems to allow private companies to access cheaper financing. It also criticized the current system of global financial governance, noting that market discipline alone cannot curtail periodic episodes of "irrational exuberance," where firms try to reap double-digit gains out of economies growing at a much slower pace, leading to situations requiring government bailouts. "The current international framework for monetary and exchange-rate policies offers opportunities for speculative activities that are highly profitable for a limited period of time, but ultimately destabilize the entire system," the study said, calling for a review of divergent policies of central banks with a view to end global economic turbulence. Oil down 40 dollars from its record price of 147 a barrel Oil prices have dipped below 106 US dollars as traders predicted that rising US unemployment would lead to consumers cutting back on petrol use. US light, sweet crude fell as low as $105.16 a barrel before recovering to settle down $1.66 at $106.23. Brent crude dropped $2.21 to $104.09. Prices have fallen forty US dollars from their record of more than $147 a barrel amid evidence of a looming recession in the US. At the same time, a number of political and currency risks have also subsided. And the failure of Hurricane Gustav to cause any major production disruption in the Gulf of Mexico also ensured the price stayed well below recent highs. With economic growth slowing, and many people worried about their job prospects, observers say there is a good chance that consumer spending will slow, limiting demand for crude oil. The outlook for the US economy became grimmer as Labor Department figures showed the unemployment rate in the US was at its highest level in nearly five years. It also revised upwards job loss figures for each of the past two months. Next week the oil producer cartel Opec meets in Vienna with investors waiting to see whether it will indicate plans to cut production - something which would be likely to stem the price drop. The organization has said it may act to defend the 100 US dollars a barrel level for crude. The dollar's recent resurgence has also helped speed up the decline in the price of oil. Many investors bought commodities to hedge against inflation and weakness greenback. But with the dollar rebounded, investment funds rid themselves of the hedges, pushing commodities prices lower. However, while the price of oil may be falling, analysts are keen to point out that markets remain volatile. Earlier this year a number of well respected Wall Street firms and analysts predicted that oil could climb as high as $250 a barrel. In the meantime, however, the drop in oil prices will bring some relief to consumers and governments who have been faced with accelerating price growth and more expensive fuel.