Will the US run out of steam?

The world economy faces “serious risks of a setback”, the United Nations Conference on Trade and Development (Unctad) warns in its annual trade and development report.

The report from Unctad says the world economy is still expanding, but the moderation of growth over the first half of 2005 should serve as a warning.

Unctad warns that “the main engine of growth, the US economy, may run out of steam before other countries or regions are able to take over that role. The countries of the European Monetary Union have been unable to pull out of a long economic stagnation and Japan, despite some improvement, is still struggling with deflation.’‘

Instead, several populous Asian countries, “in particular China and India, have emerged as new engines of economic growth”, the report says.

“Much of the slower growth in Europe and Japan is the result of the US deficit,’’ co-author of the report Detlef Kotte said from Vienna.

“The US government is aware of the problems they have with the deficit,’’ he said. “It is also true that the US economy can afford such a deficit simply because they can pay for their exports with currency they can print themselves, not an advantage most other countries in the world have, because they have to earn or borrow the foreign exchange to finance their imports.’‘

Questions have inevitably arisen about how big the US deficit can become before an adjustment is necessary, he said.
“It is very difficult to determine precisely how big the US deficit can be; the only thing we can say is that it cannot increase for ever.’‘

The driving factors behind the deficit are both the low growth of exports, and the rising imports owing to fast rising domestic consumption, he said.

“Domestic consumption in the US has been very high for many years and, in fact, it is not the first time we have warned there is a risk that US consumption cannot be maintained at that level, simply because the private households savings rate is negative, and households are highly indebted,’’ Kotte said.

“At one point, this can put the functioning of the domestic banking system at risk, and so interest rates would have to be raised,’’ he said. “Also, with rising oil prices, all the indebted households will struggle to service their debt.’‘

The picture for China and India, on the other hand, looks quite good, he said. “These two countries have not only had higher growth rates than the average of the world economy and the average of developing countries, but they have maintained these for many years,’’ he added.

“In many countries in Latin America during the Eighties and during the Nineties, you also had high growth rates, but these were boom and bust cycles, whereas the sustained growth in many Asian countries, particularly these two big economies, shows that economic structures are developing very well,” Kotte said.

The report says the world economy grew by almost 4% in 2004, the best performance since 2000. The growth rate this year is forecast to be about 3% for the year as a whole. But developing countries as a whole are expected to grow between 5% and 5,5%.

The report does warn, however, of some “dark clouds” above developing countries. “Oil prices are historically high and place a huge burden on many developing countries,” the report says. “And there has been no multilateral action that might gently defuse global current account imbalances.”—IPS

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