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 today, which says that a weakening housing market in the United States – the world’s largest economy – is a “major factor” in the slowdown.
Despite this however, the World Economic Situation and Prospects 2007 report highlights that growth in developing countries is “expected to remain robust…albeit with a mild moderation,” noting that last year East Asian economies continued to lead economic growth in the developing world and the likelihood is that growth will remain strong.
“Stepping back from the all-time high growth in world gross product (WGP) of 4.0 per cent reached in 2005 and the estimated 3.8 per cent growth for 2006, global growth is expected to slacken at a pace of 3.2 per cent in 2007,” it states. In UN estimates, the growth of WGP is calculated using country weights for gross domestic product in dollars at market prices.
“A weakening housing market in the United States is a major factor into the global slowdown… The cooling of the housing boom is expected to depress consumer demand and slow the growth of the US economy.”
While the report, which is produced annually, assumes a mild adjustment in the housing markets, and hence a moderate slowdown in the economy, it also offers a more pessimistic scenario in which US economic growth would be less than 1 per cent, causing in turn a reduction in global growth by “more than one percentage point.”
“In addition, a collapse of house prices in major economies would provoke a crisis in the mortgage markets and set in motion a deflationary adjustment in the global imbalances, enhancing the risk of a major upheaval in financial markets,” it warns, while also highlighting the challenges for the global economy caused by high oil prices.
To combat such global imbalances and bring more stability to the world economy, the report calls for countries to better coordinate their macroeconomic policy, although it acknowledges that such an approach faces obstacles, including for example divergent views on the state of the US economy and the strength of China’s growth.
“Existing national macroeconomic policy stances are not designed around the need for achieving an adjustment in the global imbalances… a coordinated strategy, in contrast, could help avoid the negative growth effects and create confidence in the stability of financial and foreign-exchange markets.”
Launching the report at UN Headquarters in New York, Under-Secretary-General for Economic and Social Affairs José 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 to slash poverty and other global ills by 2015.
“This slowdown will be generalized, all country groups that we analyzed 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 emphasizing 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… this we consider to be a very problematic feature of the world economy.”