The United Nations warns global imbalances, and the United States trade deficit in particular, will not be corrected by a rapidly falling dollar, contrary to many expectations. In its annual report on the World Economic Situation and Prospects, the United Nations says strong global growth this year will depend on how the U.S. dollar and global imbalances unwind.
The UN report warns that the possibility of an abrupt and globally damaging downturn persists. It says a depreciation of the dollar alone is not enough to reduce the global imbalances to sustainable levels in an orderly fashion.
UN economists explain the decline of the dollar is failing to bring about a correction because the US dollar is the main currency of global exchange.
The chief editor of the UN report, Ian Kinniburgh, says the United States alone cannot correct the problem. He says both deficit and surplus countries have to take action to avoid recession in the world economy.
"We believe there should be equal action taken elsewhere because if the action is focused on the United States, with the United States being the current engine of growth, if we slow down the United States in order to correct the imbalances in that country, it will have an overall global contraction, the contractionary impact," he said. "So, it needs to be countered by stimulus measures elsewhere."
Mr. Kinniburgh says many US trading partners which have ballooning trade surpluses should take steps to correct the global imbalances. For instance, he says countries such as Japan, Western Europe and Asian developing countries could stimulate domestic consumption.
Despite this downside, the report presents a generally upbeat assessment of the world economy. It says the world economy grew by four percent last year and is expected to increase by 3.25 percent in 2005. It notes the Chinese and US economies are jointly supporting global growth.
While oil prices increased last year, it says the price hike was not as severe as that which occurred during the 1980s. The report notes Chinese demand, and a surging world economy, have reversed the longstanding decline in non-oil commodity prices. Mr. Kinniburgh says this has been very important for some of the poorer countries.
""These high non-oil commodity prices contribute to growth in these poorer countries essentially because they involve a transfer of income from the richer consuming countries, by and large richer, not universally, to some of the poorer countries," said Mr. Kinniburgh. "And, here we are thinking particularly of some of the African countries and in particular the mineral exporting countries. So, the increase in non-oil commodity prices has, in fact, been a plus for the developing countries."
The report says stronger commodity markets helped boost economic growth in developing countries to five and one half percent last year, the strongest in two decades. It says African growth of four and one half percent in 2004 was fuelled by higher agricultural output, improved political stability and incoming donor support, as well as stronger commodity markets.