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World economy seen contracting by 1% or more

  The world economy will contract by at least 1% this year, the head of the United Nations Conference on Trade and Development (UNCTAD) said Friday.

That figure reflects positive growth of 2.5 to 2.6% in developing countries, and a 2% decline in advanced economies, UNCTAD Secretary-General Supachai Panitchpakdi told Reuters in an interview.

“We might see more compression on developing country growth and that of course results in a deeper worldwide contraction, so minus one at the moment but it certainly could be deeper than minus one,” Supachai said.

At the end of January, the International Monetary Fund’s revised World Economic Outlook projected world growth at plus 0.5%, reflecting a 3.3% expansion in developing countries and 2.0% contraction in advanced economies.

Supachai cautioned that no one has firm forecasts, with estimates under constant revision as each day’s gloomy economic figures come in.

Many people have forecast that world growth will be buoyed up by resilient Asian economies, but Supachai -- a former Thai deputy prime minister and director-general of the World Trade Organization -- said his latest data indicated that the fall in exports in Asia could match that of the 1997/98 Asian crisis.

However he said in contrast to that crisis, the Asian financial sector now looked relatively strong. “I’m convinced that at the moment because of the low level of exposure to international borrowings, financial systems in Asia should still be doing satisfactorily in spite of the fact that there will be a credit squeeze for them as well”, he said.

Supachai said private sector borrowing in developing countries was likely to drop this year to half of 2008’s levels and inflows of foreign direct investment (FDI) to developing countries would also fall, but probably by a smaller amount.

Global FDI fell 21% in 2008 to $1.45 trillion, but that largely reflected the drying up of mergers and acquisitions in advanced economies, and FDI to developing countries still showed a 4% rise in 2008. Supachai said he was particularly concerned about investment inflows into Africa, given the fall in energy prices, as 80 to 90% of investment to Africa in recent years had been from the extractive industries and much of that would now stop. (Reuters)