MercoPress. South Atlantic News Agency

World economy heading for first contraction since 1930, warns UN

United Nations said on Monday the world economy faces its worst downturn since the Great Depression. It expects world economic output to shrink by as much as 0.4% in 2009, due to a slump among developed countries - particularly the US and in Europe.

This would mark the world economy's first year of contraction since the 1930s, the UN said. The report added there had been complacency about the impact of the financial crisis on poorer countries. "It seems inevitable that the major countries will see significant contraction in the immediate period ahead and that recovery may not materialise any time soon, even if the bail-out and stimulus package succeed," it says. The UN expects developed economies to shrink by up to 1.5%, while developing nations should expand by at least 2.7%. But because of higher population growth in developing countries, income per capita for the world as a whole is expected to fall in 2009. And the slowing of growth in the poorest countries "suggests a significant setback in the progress made in poverty reduction in many developing countries over the past few years." The UN's World Economic Situation and Prospects 2009 report gives three forecasts for growth next year - a baseline forecast of 1% growth, a pessimistic scenario of a 0.4% contraction and an optimistic scenario of 1.6% growth. This compares with growth of 2.5% in 2008 and 3.8% in 2007. Rob Vos, chief economist at the UN Secretariat and co-author of the report, told BBC News that the gloomy forecast was a distinct possibility unless financial markets calmed down and bank lending quickly returned to normal levels. "Day by day, we are getting closer to the pessimistic scenario," he said. The world economy last contracted in the 1930s amid the Great Depression, he added. The report said that developed economies have led the downturn, but that the global nature of trade and finance meant that economic weakness had spread rapidly to developing countries. It warned that the international community had been complacent about the impact of the global financial crisis on poorer countries. They are facing higher borrowing costs and lower export growth. The UN also says that the downturn highlights key failures in the international financial system. The reliance on the dollar as the sole reserve currency poses risks for developing countries, since a collapse in the value of the dollar could have severe effects on their earnings. The report also calls for increased funding for the IMF and World Bank, greater international policy coordination, particularly in relation to exchange rates, and fundamental reform of the system of financial regulation. And it says that developing countries need mechanisms to "mitigate the damaging effects of volatile capital flows and commodity prices" including additional funds during downturns when private flows tend to dry up. The UN usually publishes its annual economic report in January but it brought forward the release of the main chapter to coincide with the UN Conference on Financing for Development in Doha, Qatar. The conference aims to track progress on development aid given fears that rich countries will cut back on aid as a result of the looming recession.