UNITED NATIONS, Jan 26: Global economic imbalance will not be corrected by a rapidly falling dollar since the depreciation is weakening demand in the United States' creditor countries and softening the benefits to US exporters of a cheaper trading currency
, a new United Nations report said Tuesday.
Assessing its "World Economic Situation and Prospects 2005" the UN Department of Economic and Social Affairs (DESA) says cyclical economic recovery reached a peak in 2004, especially for developing countries, and "the possibility of an abrupt and globally damaging correction persists, since the depreciation of the dollar alone seems unlikely to be sufficient to reduce the global imbalances to sustainable levels in an orderly fashion.
The US and Chinese economies are the main engines of global economic growth, with the United States stimulating manufacturing and China buying raw materials from resource-rich developing countries and pushing up their average growth by 5.5 per cent, the strongest in two decades, it says.
"The global imbalance is between consumption and debt in the United States and ballooning surpluses in many US trading partners. Currency changes by themselves, especially bilateral currency manipulation, will not resolve the problem," it adds.
The report observed the problem is more complicated noting that depreciating dollar may spur growth in the United States and spur more consumer spending on foreign goods.
But a greater drop in the dollar could hurt the very economies of Europe and Japan that need to grow in order to purchase American exports and help right the huge American trade imbalance.
Instead, the United Nations report urges all the major industrial countries to work out a solution that will help the United States reduce its trade deficit by spurring their own economies to grow faster, especially Japan and the countries of Europe.
The American trade deficit is a global problem in part because the United States is the fastest-growing economy among industrial nations and, together with China, is largely responsible for helping pull the world economy out of the doldrums.
But whereas China has been an economic engine by its huge growth in manufacturing and exports, the United States has pushed growth by consuming far more goods than it exports.
The report said the global recovery reached its zenith at the beginning of January 2005, with the gross world product increasing by 4 per cent last year compared with 2.8 per cent in 2003.
Over all, the developing economies, including China and India, are doing better than the industrialized nations, according to the United Nations report. "We have a very peculiar mix that is almost unprecedented," said José Antonio Ocampo, the United Nations under secretary general for economic and social affairs, in an interview.
He said that the mix included high commodity prices, high oil prices and a lack of major disorder in the financial markets, which routinely hurt the more vulnerable developing countries.
The biggest problem facing the developing world is the money they have to give rich nations for old debt repayments and the money they are spending to accumulate international reserves to protect against a future financial crisis.
Much of those reserves are made up of United States Treasury obligations, which in turn are underwriting the United States debt. OIL Meanwhile, the "oil shock" of a 50 percent price rise in the first six months of 2004 was based on a demand surge, not the inadequate output of previous shocks "and therefore is more amenable to smooth market adjustment," it says.
Oil prices would be higher than average but lower than last year's peak, UN Under Secretary General for Economic and Social Affairs José Antonio Ocampo told a news conference in New York on the report's launch.
Balances in the oil market had changed because the war in Iraq had generated a "fear premium" that had rippled throughout the Middle East region, but oil prices had not had a negative effect on the overall world economy.
Nonetheless, "greater global economic cooperation would be needed to avoid a hard landing," with challenges ahead for many countries and their central banks, Mr. Ocampo said.
Only six African countries grew by the 7 per cent they need to reach the Millennium Development Goals (MDGs) of halving extreme poverty by 2015, it says. Gross world product increased by 4 per cent in 2004 and could rise by 3.25 per cent this year, unless there is a negative market reaction to the falling dollar and rising US deficit.
