UN report says world economy will keep moderate growth of at least 3 per cent

The world economy will grow by slightly more than 3 per cent this year but the spectre of oil price surges, an outbreak of avian flu or a crash in housing prices could threaten the smooth slowdown of economic growth that has evolved over the past year, the United Nations says in a new report released today.

Growth is expected to slow in most of the industrial world in 2006 – registering 3.1 per cent in the United States, 2.1 per cent in Europe and 2 per cent in Japan – while developing countries expand at a rate of 5.6 per cent, according to the report, “World Economic Situation and Prospects 2006.”

China and India remain the world’s most dynamic economies and the rest of East and South Asia is expected to increase by more than 5 per cent. Latin America lags behind with a growth rate of 3.9 per cent as its largest economies, Brazil and Mexico, struggle. The African continent’s economic expansion should remain solidly above 5 per cent, according to the report.

Prepared in part by the UN Department of Economic and Social Affairs (DESA), the 160-page annual study shows that the economies of the least developed countries – buoyed by higher commodity prices – will grow by 6.6 per cent in the coming year. On the other hand, any scenario leading to a collapse in commodity prices would adversely affect these 50 nations.

One of the major phenomenon sapping the prospects for balanced growth in the world economy is the so-called “investment anaemia,” UN Under-Secretary-General for Economic and Social Affairs José Antonio Ocampo told a news conference in New York at the report's launch.

“It’s universal, with the exception of China,” Mr. Ocampo said. “We point out that a major challenge is to recover investment in many parts of the world.” He later added that greater investments by corporations and governments in machinery, new factories and infrastructure could help iron out the global financial imbalances that might undermine economic stability.

The report states that one of the gravest dangers to the world economy’s stability may lie in these global financial imbalances as the US’s current account deficit totals $800 billion while Japan, emerging Asia and major oil-exporting countries amass saving surpluses of $100 billion to $200 billion each. Since the United States is a major producer of capital goods, a surge in investment by other countries in the machinery needed to power factories or build bridges, for example, would help close the country’s current account deficit by increasing US exports.

“The U.S has been running a deficit and it has generated the impression that it is not a serious problem,” Mr. Ocampo said. “But we point out that the impression is deceiving. The risk, although low, has very high costs.”

Foreign investors help US officials cover the country’s current account deficit by investing in US dollar-denominated assets. If foreign investors lose confidence in the US economy, they could pull their money out and contribute to a financial crisis.

Mr. Ocampo also called for greater coordination of macro-economy policy among key industrial and developing nations. He said the International Monetary Fund (IMF), which was created to protect global financial stability, should play a central role in helping nations coordinate their macro-economic policies.

The report is the UN’s annual analysis of current developments in the world economy and emerging policy issues. It is a joint effort of DESA, the UN Conference on Trade and Development (UNCTAD) and the UN’s five regional commissions.