By  on June 26, 2007

GENEVA — Robust economic expansion in China and India, growing U.S. import demand and a recovery in Japan and Europe are fueling a strong global economy, according to a report by the Bank for International Settlements.

The bank's annual report for 2006-2007 anticipated continued broad-based expansion, easing inflation pressures and gradually receding imbalances among the major economic powers.

The BIS, also known as the central banker's central bank, anticipates real economic growth in the major economies of the world to expand by 4.3 percent in 2007, compared with 4.8 percent a year earlier.

However, BIS analysts believe there are a number of near-term risks. Specifically, the analysts pointed to global inflationary pressures, structural imbalances and the impact of the downturn in the U.S. housing market, which BIS cautions "might not yet have been fully met."

An economic downturn could also "give rise to protectionism," the report warns, noting these pressures are already very substantial in Western nations.

America's role in the global economy is also undergoing a shift. According to the report, European and Asian economies are becoming less dependent on the U.S. to drive their growth. For example, in early 2007, the value of China's exports to Europe surpassed that of exports to North America for the first time. Moreover, the proportion of exports from major economic regions going to the U.S. contracted between 2001 and 2006, with the exception of China.

While China has emerged as the dominant force in global manufacturing, it is often emerging Asian economies that are supplying materials. The impact of a U.S. slowdown would, therefore, have a direct impact on China but also a secondary impact on those emerging Asian economies.

"A U.S. slowdown affects emerging Asia by lowering demand for its exports to the U.S., but also has indirect effects," said the report. Slower demand for Chinese exports would translate into China lowering its imports from other countries in the region. The BIS highlights that a large share of China's imports are intermediate goods, which are then processed for export.

The report goes on to emphasize that China is shifting its export mix from labor-intensive to more technology-intensive goods."Between 1998 and 2005, the share of consumption goods in China's final exports fell from 48 percent to 32 percent," said the report.

Countries with no offsetting production inputs to China are likely to find their trade opportunities with the world's largest nation reduced, the report concludes.

BIS economists project China's economy to grow in 2007 by 10.3 percent, compared to last year's 10.7 percent increase.

On the outlook for key currencies, the BIS said the dollar "clearly remains vulnerable to a sudden loss of private sector confidence" due to the size of its external debt position. Similarly, the BIS suggests China should show a willingness to let its currency, the yuan, rise.

"Such a move would allow other Asian currencies to move up further against the U.S. dollar, again contributing to a reduction in global trade imbalances," said the report.

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