India, China to maintain growth despite global slowdown

The United Nations has predicted a deceleration of the world economy this year after three straight years of growth with American economy weakening dragged down by softening housing market.

But the growth will remain robust with slight moderation in developing states and economies in transition, a new report said, noting that among developing nations, sustained high growth in India and China has engendered more endogenous growth through increasing south-south trade and financial linkages.

Stating that the American economy will be a major drag for the global slowdown, the report, released on Wednesday, maintained that no other developed economy is expected to emerge as an alternative engine for the world economy with growth rate in Europe forecast to slow down to 2 per cent and in Japan below 2 per cent.

The growth of world gross product is forecast to moderate its pace to 3.2 per cent from estimated 3.8 per cent during the last year. The report holds out the possibility of much stronger slowdown in American economy, leading to sustained risks. These include dollar losing its value too fast or inability of the United States to draw outside investments.

The report expresses concern over widening current account imbalance across the regions and countries. The US, it said, is running a current account deficit around $900 billion matched by surpluses generated by Germany, Japan and, more importantly, by developing regions and economies in transition including major oil exporters.

As a result, the indebtedness of US has deepened to the extent that it calls into question the sustainability of current account constellation of global imbalances.

The report predicted a moderate reduction in the global imbalances because of slow down of US economy, among other factors. But it warns of risks of a disorderly adjustment, stressing that slow progress, if any, in the unwinding of the global imbalances will enhance the risk of a strong speculative wave towards dollar depreciation.

Such exchange rate depreciation, it said, would reduce the external deficit of US but given the dependence of global economic growth on demand stimuli from the world largest economy, falling American import demand would have further global deflationary repercussions.

This, in turn, could quite easily unravel the momentum of economic growth in developing countries and jeopardize any further progress in poverty reduction, it adds.

The headline inflation rate, the report finds, have risen in many economies last year but mostly it is attributable to first-round effects of higher oil prices.

So far, the report said, there has been only limited pass through of higher energy prices into core inflation and inflationary pressures are expected to moderate this year in view of retreat of oil prices in the second half of the last year, the expected slowdown in the global economic growth and tighter monetary policy stance in many economies.

The exceptions, it adds, are a few countries in Africa which have experienced sharp increase in inflation owing to food shortages, currency depreciation and stronger pass through of higher oil prices to consumers and producers.

But it finds that so far higher oil prices have not had the same dampening effect on the world economy as they had in the previous episodes of comparable price movement. Oil exporters among the developing countries have benefited and buoyant non-oil commodity prices have offset rising import cost of oil.

But a number of low income net oil importing countries did not see an improvement in terms of trade and have been increasingly hurt by the impact of higher energy prices.

The developing countries and economies in transition, continuing their robust upward trend, reached average growth rates of 6.5 and 7.2 per cent last year but there the growth was not uniform across the regions, it says.

During the current year, the report projects a moderation in the growth rate to 5.9 per cent for developing nations and 6.5 per cent for economies in transition.

Buoyant commodity prices, it says, benefit may developing countries and also the economies in transition especially the Commonwealth of Independence States.

The performance of least developing countries also remains remarkably strong, averaging 7 per cent last year, the report says and forecasts growth of the poorest states to remain equally strong in the current year.

Notwithstanding the improvement in both their domestic economic conditions and stronger inter-regional linkages, most developing countries remain vulnerable to any slowdown in major developed economies and to the volatility of international commodity and financial markets, the report said, The unemployment rates declined in most developed countries last years because of strong economic growth but the developing nations were not that lucky.

Despite higher output growth, in most developing nations, employment growth has not been strong enough to substantially reduce unemployment rates, the report said.

Among the factors that impeded job growth, the report lists capital intensive nature of commodity producing sectors, which generated most of the growth stimulus in Africa, and labour shedding in China resulting from restructuring of State-owned enterprises, strong productivity growth and labour shifts out of agriculture.

The situation is similar in the economies in transition where the unemployment rates remain high despite sold growth.

Stating that the possibility of a more severe downturn in housing market represents a significant downside risk to economic outlook, the report pointed out that a number of economies have witnessed appreciation of house prices over the past decade, which are associated with wealth effects.