UN warns against premature withdrawal of stimulus packages

"Most of the global demand is currently being held up by expansionary fiscal policies so if this would be withdrawn now then probably we will recede back into negative territory or possibly into worldwide recession," said Rob Vos, Director of Development Policy and Analysis from the UN's Department of Economic and Social Affairs (DESA).

The recovery in the second half of 2009 would be largely due to the hefty stimulus packages. Pulling out these due to concerns about mounting fiscal deficits and levels of public indebtedness could lead to a "double dip recession," he said.

"At this point there is no other source of demand to keep the economies going," Vos added.

In a preview of the annual economic forecast, the UN said China and India growing at more than 6 per cent would lead the world economic recovery next year but warned that the bounce-back would remain "fragile".

The world economy would experience a "modest recovery" of 2.4 per cent in 2010 after the world gross product has declined by 2.2 per cent in 2009.

Launching the latest UN World Economic Situation and Prospects, Vos said, "Developing countries on an average show much positive growth rate on the back particularly of China and India, which both will grow over 6 per cent."

He said India and China’s economic growth would pull the average of East Asia to 6.7 per cent and South Asia to 5.5 per cent and the average for developing countries to 5.3 per cent.

Still, "We would still be seven per cent less than where we would have been without this crisis," Vos said, noting that 2.4 per cent growth is possible if there are no further negative shocks and no "renewed distress" in the financial sector.

The UN report finds that the United States declined by 2.5 per cent this year but would rebound by 2.1 per cent on the back of its hefty stimulus package. Europe will have a weaker recovery with Britain and Spain lagging behind other countries.

Vos noted that after the "free fall" of the global economy, the second quarter this year had seen some stabilisation of financial market, rebound in trade as well as industrial production. Commodity prices have also picked up for countries that export oil, minerals, food products and other primary goods.

"The levels are still below where they were a year ago but we’ve seen a stop in the downward trend," Vos said. "We are not of the woods yet."

On the downside, the UN expert said employment rates would stay up and lag well behind the recovery in output.

"Since firms are not expecting yet that recovery is robust so they are also reluctant to rehire workers they have shed during this crisis," he said.

The DESA director also stressed that while 2010 will see fewer countries with negative per capita income growth, there will be fewer countries that will have growth rate of more than 3 percent growth rate per capita, which is the minimum growth rate in order for countries to obtain poverty reduction.

"In that sense the recovery will be weak and too weak for many countries to make up for the setbacks of poverty reduction because of this crisis," he said.