US slowdown could spark global economic recession - UN

THE apparent US economic slowdown could trigger global recession this year and stymie years of robust growth in Asia and Africa, the UN said.

"The major uncertainty for 2008 now emanates from the US economy," according to the world body's World Economic Situation and Prospects 2008.

"A further slowdown in the world's major economy will hit many of the 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," it said.

The report said the economies of Japan and Western Europe, already operating near production potential, were not capable of taking up the slack.

"The domino effect of a US recession would be to knock down export growth from China, Europe and Japan, in turn reducing their demand for exports from developing countries," it said.

The report forecast that the world economy would grow at 3.4 per cent this year, down from 3.7 per cent in 2007 and 3.9 per cent in 2006.

It stressed that world growth was "robust and broad-based" last year, with more than 100 economies posting 3 per cent growth of per capita output or more.

It said developing economies and those in transition boosted their share of world trade from 35 per cent in 2000 to over 40 per cent last year.

"Remarkably, economic growth in Africa strengthened in 2007 to near 6 per cent," the report said.

But it cited "a clear and present danger of the world economy coming to a near standstill" linked to the housing slump in the US and the subsequent credit crunch as high-risk borrowers defaulted on mortgage payments.

"The ongoing housing downturn in the United States became much more serious in the third quarter of 2007, with the meltdown of sub-prime mortgages triggering a full-scale credit crunch that reverberated throughout the global financial system," the report said.

In addition to the US subprime home loan crisis, where billions of dollars have been lost on mortgage-backed securities, other factors feeding fears of a global recession include the sharp decline of the US dollar and a gloomy outlook for the US labor market.

The report noted that while central banks in major economies had acted to alleviate the financial stress, these measures "do not address the root causes of huge imbalances" between financial surplus nations, such as China, Japan and major oil-producing nations on the one hand and deficit countries such as the US on the other.

The UN said a realignment of exchange rates was one way of addressing global imbalances, although it could lead to a loss of confidence in and a run on the dollar.

The report instead recommended economic stimulus through stronger demand in countries with large savings and current account surpluses, such as China, Japan and oil-exporting countries.

From correspondents in New York

January 10, 2008 10:00am