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ECONOMY: Global Downturn Linked to Faltering Dollar

Mithre J. Sandrasagra

UNITED NATIONS, Jan 11 2007 (IPS) - The world economy is expected to slow this year after three consecutive years of historically high growth, according to a new United Nations report issued Wednesday.

Stepping back from the all-time high growth in world gross product (WGP) of four percent reached in 2005 and the estimated 3.8 percent growth for 2006, global growth is expected to slacken to a pace of 3.2 percent in 2007, according to the annual U.N. report, titled “World Economic Situation and Prospects 2007”.

Speaking at the report’s launch here Wednesday, Under-Secretary-General for Economic and Social Affairs Jose Antonio Ocampo stressed that despite the global slowdown, developing countries will continue to grow and this bodes well for attaining the Millennium Development Goals (MDGs), a set of objectives agreed to by world leaders in 2000 to slash poverty and other global ills by 2015.

“This slowdown will be generalised, all country groups that we analysed will experience that slowdown… although for developing countries as a whole, we expect relatively rapid economic growth,” he said, adding that “financial conditions for the developing world have been very positive and we hope they will continue to be positive this year.”

“However, one negative aspect that we have been emphasising for several years in our report is the fact that the transfer of resources has been from developing countries to developed countries… the opposite of what is expected according to normal economic theory,” Ocampo stressed. “This we consider to be a very problematic feature of the world economy.”

Transfer of resources from the developing to the developed world reached more than 650 billion dollars in 2006, according to the report.

The primary reason for this transfer of assets was to finance the U.S. deficit, which has grown to over 800 billion dollars, Ocampo told reporters here.

The report pointed to a weakening housing market in the United States as the major factor in the global slowdown. The cooling of the housing boom is expected to depress consumer demand for other items and slow the growth of the U.S. economy to a rate of 2..2 percent in 2007. The economic recovery in Japan and Europe is not strong enough to replace the U.S. as the engine for growth of the world economy.

“The housing market,” Ocampo stressed, “could be the most important factor in the world economy, especially if the U.S. housing market continued to experience a recession, and if that recession started to affect housing prices.”

An alternative scenario than that predicted in the report was a strong recession generating a much stronger slowdown of the U.S. economy. In that scenario, the U.S. economy would only grow 0.5 percent this year, compared to 2.2 percent in 2006.

“If that materialised, the world economy would experience a much more significant slowdown – 1.9 percent growth rather than 3.2 percent,” Ocampo said, warning that, “The possibility of a strong recession in the housing market, particularly in the U.S., and its contagion of other industrial countries, was the major risk factor to the world economy today.”

A major underlying risk “which was of low probability but high influence if it happened” was the eruption of global imbalances in the world economy resulting in a major crisis for the U.S. dollar, Ocampo warned.

The U.S. deficit has been increasing in recent years. To balance this, surpluses exist in all major regions, including in Asia, Europe and, the oil-producing Arab states, which are the major sources of finance for the U.S. deficit.

“The real question was whether this would affect the U.S. dollar, which had been under a weakening pattern in recent months?” Ocampo asked.

To address this issue, the report suggests the need for microeconomic policy coordination among the major industrial and developing countries, proposing several alternatives, including the possibility of moving towards a “multicurrency system that was less dependent on the United States dollar and more on other major currencies.”

A hard landing of the dollar would further raise uncertainty among international investors and could upset financial markets, according to the report.

Developing countries would likely suffer most from the more volatile and less buoyant international economic environment caused by such adjustment, should it occur, Ocampo warned.

In 2006, according to the report, developing countries and economies in transition reached average output growth rates of 6.5 and 7.2 percent, respectively. Growth in developing countries is expected to remain robust in 2007, albeit with a mild moderation: 5.9 percent for developing countries and 6.5 percent for economies in transition.

East Asian economies continued to lead economic growth in the developing world, posting an average 7.7 percent in 2006. China recorded a growth rate of more than 10 percent. Also growth in South Asia, led by India, has been strong at 6.7 percent in 2006.

There was increased but still insufficient Official Development Assistance (ODA) in 2006, according the U.N. The report, however, points to the positive trend of “emerging donors”, such as China and India which have contributed significant additional funding in development assistance.

The performance of the Least Developed Countries (LDCs) remains remarkably strong, averaging nearly 7 percent in 2006, especially for oil-producers and other mineral exporters among these countries that benefit from high commodity prices. Growth in these countries is expected to remain strong in 2007 – although other studies have shown that high growth rates do not always lead to poverty reduction.

The LDCs will continue to lead world economic growth at 7 percent, Ocampo told reporters.

Noting a diversity of experience in Africa – home to 34 of the 50 LDCs – Ocampo said that Equatorial Guinea, Chad, Sierra Leone and Liberia had done well, while Zimbabwe and Seychelles had not in 2006.

Growth in Europe, which exceeded expectations in 2006, is expected to moderate to around 2 percent in 2007 and in Japan, which also experienced robust growth in 2006, will slow to below 2 percent in 2007.

Transitional economies, however, would continue to grow at a very fast pace, Ocampo said, noting that the Russian Federation was the basic engine for growth in its region.

“In general,” Ocampo stressed, “all regions of the developing world were expected to grow at a faster pace than the industrial economies.”

In moving forward, the report proposes the creation of a new mechanism to coordinate macroeconomic policy and targets aimed at reducing imbalances, while avoiding a global recession.

It would seek to increase savings and exports and lower U.S. debt, and strengthen domestic demand in the main creditor countries, particularly in Japan, developing Asia and the major oil producers.

Such consultations, the report stresses, should involve all major players and include fair representation for developing countries.