In the wake of numerous challenges, the world economy is teetering on the brink of a
severe global economic downturn. The deepening credit crisis in major developed market
economies, triggered by the continuing housing slump, the declining value of the United
States dollar vis-à-vis other major currencies, persisting global imbalances, and soaring
oil and non-oil commodity prices all pose considerable risks to economic growth in both
developed and developing economies.
Additionally, the unfolding food crisis, which is not only a grave humanitar-
ian issue, but also a serious threat to social and political stability in some developing
economies, endangers the achievement of the millennium development goals (MDGs)
by reversing some of the progress towards those goals made so far.
In the face of these uncertainties, the growth of the world economy, which
registered a rate of 3.8 per cent in 2007, is expected to decline markedly, to 1.8 and
2.1 per cent in the outlook for 2008 and 2009, respectively. The prospects remain sur-
rounded by much uncertainty. It is not clear whether the monetary and fiscal policy
stimuli implemented in the United States will take effect any time soon or whether more
protracted problems in financial and housing markets will push the major economy into
a deeper recession with worldwide consequences. Based on conditions of the second
quarter of 2008, the baseline scenario seems the most probable of the three scenarios
presented, with less likelihood of the occurrence of the better or worse outcomes that
are presented in Table 1.
The baseline forecast projects a pace for world economic growth of 1.8 per
cent in 2008, which is a downward adjustment from the baseline forecast of the World
Economic Situation and Prospects 2008 published in January, but close to the pessimistic
scenario presented in that report.1 The revision is informed by further deterioration
in the housing and financial sectors of the United States in the first quarter of 2008;
this is expected to continue to be a major drag for the world economy, extending into
2009. The contagion effects of the sub-prime mortgage market turmoil on developing
countries and economies in transition have so far been limited, but as the downturn in
the United States protracts, a more adverse impact should be expected and which would
dim the prospects for reaching the MDGs by 2015.
A more benign outcome is possible, if the monetary and fiscal policy stimuli
taken by the United States take effect in the course of 2008 by boosting consumer
spending and restoring confidence in the business and banking sector. In this case, the
world economy is expected to experience a moderate slowdown to 2.8 per cent in 2008
and a slight recovery in 2009 as growth improves to 2.9 per cent. In the pessimistic
scenario, the world economy would slow to 0.8 per cent in 2008, followed by a sluggish
recovery of 1.4 per cent in 2009 (See Figure 1).