Himalayan News Service

Kathmandu, July 6:

Global imbalances and high oil prices have threatened world growth in 2005, says a mid-term review of United Nations for 2005.

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 three per cent expansion expected for 2005 and 2006, down from the four per cent of 2004, states the UN projects in its mid-year economic review. However, in South Asia, 2004 growth of seven per cent is likely to be replicated in 2005 and 2006, predicts the UN’s report.

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.

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

Developing country economies overall surged at a 6.6 per cent growth rate in 2004, and appear to be set for a still-strong growth of over five per cent in 2005 and 2006 says UN. “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 three per cent per year absorbs much of the positive impact. The economies in transition are projected to grow by six 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 was quoted as saying in the report.

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.

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, says the UN report.

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 US dollar as the international reserve currency may wane.

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 materialise slowly, prices are expected to remain at high levels by historical standards and to be volatile.”