Cautioning that the world economy faces serious challenges in sustaining strong growth rate of last few years, the United Nations has warned of a possible recession unless a concerted international action is taken.
In a new report released on Wednesday, the world body said there is a "clear and present" danger of the world economy coming at a near standstill and has called on the member States to develop a concerted international policy to address global imbalances and calm currency markets.
The baseline forecast of the UN is for the world economic growth rate to moderate to 3.4 per cent this year, following the trend line down from 3.9 per cent in 2006 and 3.7 per cent last year. Along with coordinated stimulatory measures, the report suggested that governments should take joint action to avoid "rout of dollar" because, it said, a rapid and disorderly descent would have recessionary repercussions.
The international action should entail an agreed exchange rate realignment, which would foster soft rather than hard landing. "The risk of a hard landing is heightened by the very nature of global reserve system, which uses national currency of the United States as the main reserve currency and instrument for international payments. Under the system, the only way for the rest of the world is to accumulate dollar assets," it added.
Over the long term, it said, stability could be obtained through an officially backed multi-currency reserve system. A well-designed multilateral financial system should create equal conditions for all parties and avoid unfair competition and an asymmetric burden sharing exchange rate, the report emphasised.
Such a system should also help increase stability in the international financial system by reducing the likelihood of a crisis scenario, where capital flight out of any major single reserve currency causes potential far-reaching repercussion throughout the global economy, the study said.
The report noted that the economic growth last year was robust and broad-based with more than one hundred economies achieving three per cent per capita output or more. Developing countries growth averaged 7 per cent and remarkably, economic growth in Africa strengthened to near 6 per cent. But it warns that the economic fortunes may 'reverse'.
The major uncertainty for 2008 now emanates from the US economy, it said, emphasising that a further slowdown in the world's major economy will hit many poor nations hard as it will slow world trade and put an end to the boom in commodity prices that benefited them over the past years.
Export-led growth, the report said, has enabled the developing countries to amass over USD 3 trillion in international currency reserve holdings.
"These reserves provide a buffer against possible adverse shocks but also pose challenges to economic management of their economies in avoiding strong currency applications," it stressed.
Being invested in dollar-dominated assets, the build up of large monetary reserves by the developing countries is part and parcel of the problem of the large global imbalance as the developing countries act financier of US external deficit.
Further dollar depreciation will erode the value of their reserves holdings and diversification into other currencies could precipitate an even steeper fall of dollar.
With their economies already operating near production potential, the report says, Japan and Western Europe are not in a position to take up the slack.
Noting that trade is taking on an ever greater role in global economic growth with exports now averaging 40 per cent of GDP of all economies, the report stressed that the domino effect of US recession would be to knock down export growth from China, Europe and Japan which, in turn, reduce their demand for export from developing nations.
Under normal circumstances, the UN said, the current US slowdown could successfully be treated with ongoing interest rate cuts to stimulate economy. But in the current context, these could precipitate a further depreciation of and loss of confidence in the dollar.
"It would be safer and more useful to obtain stimulus through stronger demand in countries with large savings and current account surpluses such as China and Japan and oil exporters," it suggests.
In China, it could be accomplished through public investments and spending on heath, education and social security. In Europe and Japan, continued low inflationary pressure justify putting an end to monetary tightening and taking a neutral to moderately stimulatory stance, the report said.