CHENNAI: The United Nations has forecast a "slackening of pace'' in the world economy in 2007. After posting an all-time high growth of 4 per cent in world gross product in 2005 and an estimated 3.8 per cent in 2006, it is expected to moderate to a slower 3.2 per cent growth this year, according tothe World Economic Situation and Prospects 2007, released by the UN.

"The cooling of the housing boom is expected to depress consumer demand and slow the growth of the U.S. economy to a rate of 2.2 per cent in 2007. The economic recovery in Japan and Europe is not strong enough to replace the U.S. as the engine for growth of the world economy,'' says a UN release on the economic prospects. However, it adds that the U.S. corporate finances "are healthy and there is room for monetary easing; hence the current situation need not degenerate into a recession.''

Developing countries and economies in transition reached average output growth rates of 6.5 per cent and 7.2 per cent, respectively, in 2006. Growth in developing countries is expected to remain robust in 2007, but with a "mild moderation'' — to 5.9 per cent for developing countries and 6.5 per cent for economies in transition.

East Asian economies continued to lead economic growth in the developing world, posting an average 7.6 per cent last year. China led with a growth rate of over 10 per cent. Similarly, South Asia, led by India, recorded a strong growth of 6.7 per cent. "Prospects are that growth will remain strong, with East Asian economies expanding at 7 per cent on average, and in South Asia, will slow somewhat in 2007.''

Growth in Europe, which exceeded expectations in 2006, is also expected to moderate to around 2 per cent in 2007 and in Japan too, which experienced a robust growth last year, it will slow down to below 2 per cent this year, says the UN report.

The UN report warns of a risk of "disorderly adjustment'' of the financial imbalances. As a result of its continued and widening current-account deficit, the indebtedness of the U.S. has deepened to a level, which "more seriously calls into question the sustainability of the current constellation of global imbalances and confidence in the dollar as the world's main reserve currency could erode rapidly. A hard landing of the dollar would further raise uncertainty among international investors and could upset financial markets.''

Developing countries could suffer from the more volatile and less buoyant international economic environment caused by such adjustment, should it occur.

The UN report calls for "concerted action'' in macroeconomic policy making to avoid a disorderly adjustment and create confidence in the stability of financial and foreign exchange markets.

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