US deficits 'major threat' to world economy, says UN

The global economy grew by 4% last year, but massive US trade deficits coupled with a weak dollar overseas threaten economic stability worldwide, the United Nations said.

A generally upbeat report about the world’s finances in 2004 said the economic expansion – the best since 2000 – was part of a cyclical recovery that was reaching its peak. It said that growth is expected to slow to a little over 3% next year, but that change was not the start of a new downturn.

Economists warned yesterday that major imbalances posed a serious threat, singling out the US trade deficit, which was an estimated $650bn (€500.6bn) for the year. That led the dollar to reach a new low against the euro in 2004.

In the case of the United States, there is the double threat of the large trade and budget deficits. The top US budget analyst projected $855bn (€658.6bn) in deficits for the next decade even without the costs of the Iraq war and President George Bush’s social security plan.

The deficits have created a problem – the United States economy is boosted by the weakened dollar because its exports become more attractive and competitive. But economies like Europe and Japan, which need to be strong to help slash the US deficit, may be weakened as their currencies rise in value and make their own goods less competitive.

Undersecretary General for Economic Affairs Jose Antonio Ocampo told a news conference launching the report that that meant there must be co-ordination between governments to equalise the balance by both cutting the US deficits and expanding economies abroad by spurring domestic demand.

“We need a more collaborative effort among the differing economies, particularly among the major economies, for a long-term gradual adjustment that has to balance both deficit and surplus economies,” he said yesterday. “The US will have to adjust and will adjust.”

Bush’s treasury secretary John Snow has promised progress on the deficits - but has made clear the United States will not support the dollar by intervening in currency markets.

There were, however, many encouraging signs. One was that growth in developing countries was its fastest in two decades. That was due in part to more stable world financial markets but also to higher world oil and commodity prices, and not necessarily because of any acts of their own.

The economies of the United States and China continue to be the main engines for growth, with China especially providing new stimulus with increased demand for raw materials.

The report, UN World Economic Situation and Prospects 2005, said developed countries tended to grow at about the same rate, while in developed countries results were less consistent. Japan performed moderately well, while Europe lagged. Expansion of world trade also grew, from 6.2% to 10.6%, although it was expected to slow again to 8% growth in 2005.

“The story that comes out clearly is that actually as a group the problems of uneven or unbalanced growth is more a problem of the developed economies than the developing economies,” Ocampo said.

Ocampo said one risk was that oil prices were expected to remain high but would not hit the record prices they hit last year, which he blamed on speculation and not ”fundamentals of the markets”.

“The overall evaluation of the report ... is that this is not the major risk facing the world economy, in fact we feel that there is no major disruption in oil supplies,” he said.