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. Last Updated: 07/27/2016

World Greets New Year on Brink of Recession

NEW YORK -- Russia is suffering from a virtual collapse of its economy. Japan is wrestling with its worst recession in 50 years. And recession and unemployment are looming in Brazil, Latin America's largest economy.

An estimated 40 percent of the world currently is in recession, and economists have lowered growth expectations for 1999.

In Europe, 11 nations will merge their monies into a new common currency, the euro, on Jan. 1.

"E-Day'' is hailed as the greatest step toward European unity since the fall of the Iron Curtain in 1989 and the continent's biggest financial shake-up since World War II.

Europe and the United States, the two motors of the world economy, will likely spearhead a slight improvement in global economic fortunes in 1999. But economists warn that economic weakness is so widespread that the global economy could still slip into a recession.

"There is still a substantial risk that the world economy will plunge into recession in 1999,'' the World Bank said in its annual Global Economic Prospect report.

The bank provided two scenarios, and said the more likely is "sluggish growth'' in the world economy - around 1.9 percent this year compared to 3.8 percent in 1997 - rather than a full-blown recession, defined as growth in global output of lessthan 1 percent. The International Monetary Fund predicted world growth of 2.2 percent in 1999.

The recession scenario will come into play if Japan's economy shrinks further, investor anxiety about emerging markets intensifies, private capital flows to the developing world dry up, and a large, sustained stock market correction - 20 to 30 percent - depresses growth in the United States and Europe.

"We can't tell for sure how long this crisis will last, or how deep it will be,'' said the World Bank's chief economist, Joseph Stiglitz.

Japan, the world's second-biggest economy, Brazil, Indonesia, Russia and 33 other countries in the developing world and the former Soviet bloc will see a drop in per-capita output this year.

Japan's economy shrank at an annual rate of 2.6 percent in the latest (July-September) quarter, marking a full year of decline and the deepest recession since World War II, as debt-ridden financial institutions scaled back on lending, starving companies of cash.

Finance Minister Kiichi Miyazawa has expressed doubt the economy's contraction will be limited to the 1.8 percent the government forecast for the fiscal year ending March 31, 1999. The Organization for Economic Cooperation and Development predicted Japan's economy will shrink 2.8 percent in 1998 and grow just 0.2 percent in 1999.

The decline in Asia's biggest economy has prolonged and deepened the economic crisis plaguing neighboring countries from Indonesia to South Korea.

Half a world away, it's a brighter picture. The U.S. economy is demonstrating astonishing resilience even though the Asian slump has dried up demand for American exports. Unemployment is near 28-year lows of 4.4 percent despite factory layoffs, and inflation is the best in three decades - below 2 percent.

Analysts attributed the low unemployment rate to the fact that workers laid off by manufacturing companies hurt by loss of export sales are finding employment in service-sector jobs.

Economists predict growth in the gross domestic product will slow to 2.0 percent in 1999, from 3.5 percent anticipated this year. Most of the economic slowdown is expected to occur in the first half of 1999 with some recovery seen in the second half.

On the downside, the U.S. trade deficit in goods is up 24 percent this year (by November), running at $246 billion and administration officials predict it will soar above $300 billion next year.

On the other side of the Atlantic, growth across the 11-nation euro zone will slip to 2.4 percent in 1999, compared to 2.8 in 1998. The German economy, Europe's biggest, will grow 2.7 percent this year and 2.0 in 1999, according to government forecasts.

In the 15-member European Union, the 1999 industrial growth forecast ranges from 8.2 percent in booming Ireland to 1.3 percent for Britain.

But unemployment remains the burden of most EU governments, and it will dip only "marginally'' from 11.8 percent to 11.2 percent in 1999, European Central Bank chief Wim Duisenberg said.

Buffeted by the global crisis in developing economies and the slump in oil prices, Russia goes into 1999 with the government struggling to come up with a policy to deal with the country's worst economic crisis since the Soviet collapse.

Having effectively defaulted on some of its debts, the government's only strategy has been to beg for more Western loans. The government has warned that Russia may plunge into chaos if there is no new aid.

But Western governments and private institutions, having seen billions of dollars wasted and misappropriated, are reluctant to extend any more aid.

While some assessments project a mild recovery in the second half of 1999, all projections call for an overall decline in GDP ranging from 3 percent to 11 percent. Russia's economy is expected to shrink about 5 percent in 1998.

In Latin America, Brazil will pay the price in 1999 for failing to curb its $65 billion budget deficit, and a recession expected here will stunt growth around the continent.

Brazil plans to cut its deficit by some $23 billion (28 billion reals) next year by raising taxes and reducing spending. The combination will produce a sharp retraction, easing slightly after July.

The more optimistic economists predict Brazil's economy will shrink 1 percent. J.P. Morgan estimates a contraction of 3 percent in 1999.

With world oil prices hovering at 12-year lows of around $10 a barrel, the countries of the Middle East - especially those in the Gulf that are heavily dependent on oil - face deepening economic problems.

Iran may have to reschedule its foreign debt, while countries like Saudi Arabia and Qatar have slashed budgets and will have to keep a tight rein on spending in 1999.

Saudi Arabia, the world's largest oil exporter, is taking the biggest beating. Analysts estimate its oil income will fall to $23 billion in 1998 from nearly $50 billion in 1997.

Most of the Gulf countries already have cut spending, frozen hiring, postponed developments projects and slowed payments to contractors - all moves that will have a depressing effect on their local economies.

Global unemployment, forecast to swell to more than 9 percent in 1998 from 7.7 percent in 1997, is expected to remain fairly stable through 1999.