A new U.N. Report warns the huge U.S. fiscal and trade deficits are threatening global economic recovery. In its Trade and Development Report 2004, the U.N. Conference on Trade and Development says the United States must reign in its deficits to keep economic growth sustainable.

UNCTAD says the global economy is brighter now than it was a year ago. In 2003, the world economy grew by 2.6 percent and U.N. economists expect it to reach nearly four percent this year.

But they say the outlook for a sustained recovery is uncertain.

UNCTAD Deputy Secretary-General Carlos Fortin says the world economy has been largely driven by the United States, which essentially is operating on the basis of expansionary and fiscal monetary policies. He says this is creating fiscal and trade deficits which are much larger than they were 10 years ago.

"The problem is that all that cannot be sustained, we think, in the long-run and that adjustments will take place," said Carlos Fortin. "First on the fiscal front, the budget deficit will have to be reigned in at some point. We are making no predictions as to when this will happen. But, we feel that it will happen. The monetary expansionism is going to have to be restrained as a result, among other things, of the oil prices which are creating inflationary pressures."

Mr. Fortin says the U.S. trade deficit will have to be tackled through exchange rate movements.

The report notes that Japan and other countries in East Asia, including China, are running enormous trade surpluses with the United States. Last year, it says East Asian developing countries bought more than $210 billion in foreign currency compared to the U.S. budget deficit of $455 billion and a U.S. trade deficit of $490 billion. In other words, Mr. Fortin says about half of the U.S. trade deficit is being covered by foreign states.

"If the United States, in effect, decides to devalue in order to do something about this trade deficit, this will immediately prompt a reaction on the part of the Asian countries who have all those enormous amounts and volumes of U.S. currency," he said. "And, they may decide at that point to diversify their foreign exchange holdings and start buying assets in other denominations, particularly in the euro. That is, we think, a very serious cause for concern about the sustainability of the situation."

The UNCTAD report warns that a weaker U.S. economy and increasing trade imbalances among the major economic blocks could lead to protectionism. It adds this would increase instability in currency and financial markets, badly impacting developing countries.

The report says the developing economies, as well as those transitioning to a market economy, last year outpaced growth in the developed world, ranging from 4.5 percent to six percent. It says North Africa grew substantially due to higher oil prices and a revival of tourism.

But, the report says sub-Saharan Africa benefited less from the world economic recovery and is unlikely to reach the U.N. millennium development goal of cutting poverty in half by 2015.