Better World News: A World Currency - UN warns of threat to world economy

Thursday, January 10, 2008

A World Currency - UN warns of threat to world economy

UN warns of threat to world economy

By Harvey Morris at the United Nations

Financial Times of London
Published: January 9 2008 22:00 | Last updated: January 9 2008 22:00
http://www.ft.com/cms/s/0/e44f754a-bee7-11dc-8c61-0000779fd2ac.html

There is a “clear and present danger” of the global economy slowing to near standstill in 2008 because of a looming recession in the US, the United Nations said on Wednesday.

In a survey of the world’s economy and prospects for the coming year, the UN said the main drag was a US slowdown driven by the slump in the housing market. The spillover to other developed countries had left them too weak to replace the US as the main engine of global growth.

The report is prepared annually by the UN’s Department of Economic and Social Affairs and the UN Conference on Trade and Development.

The report’s baseline forecast was for moderately slower global growth of 3.4 per cent this year, down from 3.7 per cent in 2007.

However, its authors noted “the darkening clouds of downside risk are looming much larger than a year ago” and also offered a more pessimistic scenario in which a deep housing slump in the US would lead to a hard landing for the dollar and an outright recession. The impact of lower US imports could then cause world economic growth to plummet to as low as 1.6 per cent.

The report said measures taken so far by central banks to respond to the global credit crunch did not address the root causes of the huge imbalances between surplus nations, including China and the major oil producers, and deficit countries, in particular the US.

The UN called on governments to take joint action to avoid a possible “steep and abrupt” decline in the value of the US currency, calling for multilateral agreement on a realignment of exchange rates.

However, the huge imbalances would not be resolved merely by a decline in the value of the US dollar. It urged countries such as China to spend more on social security, health and education to reduce their surpluses. Low inflationary pressures in Europe and Japan also justified an end to monetary tightening.

In the longer term, fundamental reforms of the dollar-based international reserve system were needed “to prevent the current constellation of imbalances from re-emerging”, the report said. “A more immediate reform would be to promote an officially backed multi-currency reserve system,” it added. Such a system would help avoid the kind of crisis in which capital flight from a major single reserve currency caused far-reaching repercussions throughout the global economy.

The economies of developing countries, which grew by an average 6.9 per cent last year, had proved relatively resilient in the face of global financial turmoil. Only nine countries experienced negative growth in 2007, while 102 out of 160 for which data was available had seen per capita output increase by 3 per cent or more.
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