Global economy shows increasing signs of recovery – UN survey

The global economy is showing increasing signs of a strengthening recovery this year, with growth expected to strengthen further in all major regions in 2004, according to a new United Nations report.

But there are marked regional variations, with the United States remaining the main engine of global growth and Western Europe far behind in the international business cycle, the UN Economic Commission for Europe (UNECE) says in its newly released Economic Survey of Europe.

There was a surprisingly strong rebound in Japan and strong growth in Asian emerging markets, notably China, while in Eastern Europe and the Commonwealth of Independent States (CIS), growth has remained buoyant despite the deteriorating external economic environment, which was offset by the robust growth of domestic demand, the survey notes.

The survey said its findings are reflected in improved business and consumer confidence, favourable profit expectations in international equity markets and rising indicators for industrial and services activity.

The sustainability of the global recovery hinges notably on an improved situation in the labour markets, for which there are currently only tentative indications, it adds. But there are other major downside risks related to the realignment of exchange rates of major currencies and the large external imbalances in the world economy.

The survey says the improved global outlook is dependent on the US maintaining its role as the engine of growth. The problem with this scenario is that it will accentuate the already huge external imbalance of the US and increase the risks of disruptive adjustments of capital flows and exchange rates of the major currencies, it adds.

This points to the need to create a more conducive environment for growth of domestic demand in the rest of the world to better accommodate the external adjustment process in the US. While the depreciation of the dollar is part and parcel of the necessary adjustment required of the US, the burden has so far fallen disproportionately on the euro area, given the exchange rate policies pursued in Asian economies. On the other hand, persistent weakness of euro zone domestic demand also puts disproportionate emphasis on the dollar exchange rate as a means of adjustment, the survey notes.