By  on September 6, 2007

GENEVA — Spurred by strong growth in China and India, the world economy is projected to expand by 3.4 percent this year, compared with a 4 percent increase last year, because of the slowdown in the U.S., according to a United Nations report.

Supachai Panitchpakdi, secretary general of the U.N. Conference on Trade and Development, told reporters Wednesday that projections by his agency might need some revision because of turmoil in the markets tied to the U.S. subprime mortgage crisis. Overall, "The world economy will maintain its momentum and expand for the fifth consecutive year," he added.

U.N. trade and development chief economist Heiner Flassbeck said the U.S. economy will grow by 2 percent and noted it could slow a bit more.

The agency's "Trade and Development Report, 2007" said the "deceleration of growth in the United States was due mainly to a reversal in the previously booming housing market, which had sustained private consumption." It warns that given the higher long-term interest rates, "There is a possibility of an outright contraction in house prices that might further erode the solvency of private households and precipitate a reduction in private consumption."

Supachai was upbeat about the prospects for developing countries, predicting they "will continue to benefit from strong demand for their exports, particularly for primary commodities" spearheaded by China and India.

The report forecast China, considered the world's most dynamic economy, to grow this year by 10.5 percent and India by 8.5 percent. The study anticipates developing nations overall to average an expansion of 6.4 percent, outpacing developed countries that will average a rise of 2.4 percent.

The report predicts commodity will "remain high for some years on account of solid demand for commodities in rapidly growing developing countries, even though global economic growth is expected to slow somewhat."

Aside from the subprime crisis, U.N. analysts are concerned about the global currency imbalances and failure to address the problem. "Big institutional investors such as hedge funds are able to trigger an appreciation in the exchange of a country with a higher nominal interest rate by shifting resources from currencies with lower nominal interest rates," the study said.Flassbeck cautioned that the fallout would be "much more serious" than the mortgage crisis, and would largely affect countries that accumulated large current account surpluses such as China, Japan, Germany and Switzerland.

The agency said if financial markets "systematically distort the competitive positions of nations and companies, policy interventions are inevitable sooner or later." The U.N. advocates that arbitrary exchange-rate shifts should be managed in the same way as tariffs and subsidies.

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