UNITED NATIONS, Jan 25 (AFP) - A sharp fall in the US dollar will not reverse global financial imbalances or the deepening US trade deficit, the UN said Tuesday in a report on the international economy.
Despite the strong international economic recovery in 2004, continuing trade and capital imbalances remain a threat to economic stability, according to the annual report on the world economy of the UN Department of Economic and Social Affairs and the UN Conference on Trade and Development.
"The possibility of an abrupt and globally damaging correction persists, since a depreciation of the dollar alone seems unlikely to be sufficient to reduce the global imbalances to sustainable levels in an orderly fashion," the report said.
Economic growth around the world averaged four percent in 2004, recovering strongly from 2003, when growth was only 2.8 percent the UN said. Developing countries on average grew 6.2 percent, their fastest rate in two decades.
Growth slowed only in two regions, South Asia and the former Soviet republics, where the economies expanded at a rate of six percent and seven percent, respectively.
While the United States remained a leader among developed countries, Western Europe replaced Japan as the main drag on the global economy, according to the report. The United States expanded 4.2 percent, compared to the European Union's 2.3 percent. Japan meanwhile enjoyed a 3.6 percent growth rate.
The World Economic Situation and Prospects report called the United States and China the key drivers of the global economy in 2004.
US imports stimulated manufacturing activity around the globe, while strong Chinese demand drove up raw material prices, benefitting exporters in Africa and Latin America.
For 2005, the UN forecast slower average growth of 3.25 percent for the world economy, with the United States decelerating to three percent and Europe remaining sluggish at 2.25 percent.
However, the UN warned that stability remains threatened by key financial imbalances, especially the US trade deficit. It added that the fall in the dollar would do little to overcome the problem.
"The decline of the dollar is failing to bring about a correction because the United States is in the unique position of holding its debt in its own currency, which is the main currency of global exchange."
The report said that a correction in the US fiscal and trade deficits is necessary and likely unavoidable.
However, it suggested, the negative effects of this on the world economy could be ameliorated by increased domestic investment in countries enjoying large surpluses. Reconstruction of the tsunami-battered areas around the Indian Ocean would provide another significant stimulus to global growth, it added.
01/25/2005 20:08 GMT - AFP