30 June 2005

UN: Sustained Economic Growth in Developing Regions Opens Window of Opportunity for Development Goals

But Smooth Moderation of World Growth in 2005 Threatened by Global Imbalances, High Oil Prices, Says Mid-Year Economic Report

NEW YORK, 29 June -- After a year of the strongest and broadest growth in the world economy since the beginning of the century, the global economic expansion is losing some momentum, with about 3 per cent expansion expected for 2005 and 2006, down from the 4 per cent of 2004, the UN projects in its mid-year economic review.

But “one unusual aspect of the present pattern of global economic growth is that it is widespread among developing countries and economies in transition”, says the UN World Economic Situation and Prospects as of mid-2005 (UN document E/2005/100, an interim update to World Economic Situation and Prospects issued January 2005), released today.

Developing country economies overall surged at a 6.6 per cent growth rate in 2004, and appear to be set for still-strong growth of over 5 per cent in 2005 and 2006, the UN reports today.  In South Asia, 2004 growth of 7 per cent is likely to be replicated in 2005 and 2006.  Sub-Saharan African economies, which grew at 5.5 per cent last year, could expand even faster this year and the next -- although population growth of more than 3 per cent per year absorbs much of the positive impact.  The economies in transition are projected to grow by 6 per cent this year, off a torrid 7.6 per cent pace in 2004.

“A high rate of growth since 2004 helps to make up for some difficult years for developing economies at the beginning of the century”, UN Under-Secretary-General Jose Antonio Ocampo said at today’s press launch.  “It also opens a window of opportunity for moving ahead faster on the goals set at global conferences in the 1990s and at the Millennium Summit in 2000.  In a faster-growth environment, it is easier for developing nations to invest in health, education and infrastructure.  Aid programmes from overseas have a better chance of making permanent gains on underlying problems.”

For now, the UN reports, the international economic environment remains generally favourable for developing countries:  international trade continues to grow solidly, the rise in the prices of energy and raw materials in the past two years has improved the terms of trade for many developing countries, but not compensating for the long-term decline since the 1980s; the costs of external financing are at historical lows and capital inflows are increasing.

But the world economy faces a number of headwinds:  widening external imbalances across major regions; the unwinding of the policy stimuli of the past few years; and the rise of prices of energy and of other primary goods, according to the report.

It also cites the critical importance of fulfilling world commitments on aid, debt relief and a more open trade system, especially as to benefit the poorest nations.

Demand within Developing World

Some factors supporting developing country growth are internal to these countries, rather than to increased demand from the developed countries, traditionally the main driver for the rest of the world.  In nations such as China and India, income growth and poverty rollbacks are buttressing internal markets, which provide a source of demand alternative to exports.  This is one factor giving rise to new patterns that include growing trade among developing countries, especially the purchase of raw materials by China.

Performance of the developed countries remain the main determinant of global growth, but the dichotomy now apparent between reduced growth in the developed economies, particularly the slow growth in Europe and Japan, and slightly moderating but continued strong growth in the developing countries “suggest some degree of de-linking”, the UN says.

Tightening Not Recommended

While the economic slowdown in 2005 seems to be benign, accommodative macroeconomic policies should be maintained in most countries to prevent growth from weakening further, policy makers are advised.

Widening external imbalances across countries, cited as a risk to economic expansion in the UN’s January 2005 World Economic Situation and Prospects, continue to pose a threat, with the current account deficit of the United States expected to reach $700 billion in 2005.

The mid-year UN economic assessment warns against a strategy of relying on the adjustment in the exchange rates to redress imbalances.  Without adjustment in real economic activity in deficit and surplus countries, confidence in the U.S. dollar as the international reserve currency may wane.

The report reiterates the importance of concerted international policies to adjust the global imbalances, calling for the promotion of growth in developing countries and a reduction of the external deficit of the United States.

The UN expresses some concern about the substantial rise in housing prices in several developed countries, noting that the risks associated with possible bubbles in housing prices should not be ignored.

Oil Prices to Remain Volatile

There is also concern that higher oil prices might choke global growth, in turn, leading to another precipitous fall in oil prices.

The UN forecast is for oil prices to moderate in the second half of 2005, as global demand loses some of its dynamism.  “Nonetheless, in a context of tight supply where substantial increases in capacity are likely to materialize slowly, prices are expected to remain at high levels by historical standards and to be volatile.

“An additional challenge for the countries that produce and export oil and raw materials is to make a better use of the increased revenues to restructure their economies so as to reduce their vulnerability to the vicissitudes of commodity prices in the longer run”, the report says.

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