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Un says world economy still delfation risk { October 2 2003 }

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   http://reuters.com/financeNewsArticle.jhtml?storyID=3548633&type=economicNews

http://reuters.com/financeNewsArticle.jhtml?storyID=3548633&type=economicNews

UN says world economy still at risk from deflation
Thu October 2, 2003 01:01 PM ET
By Richard Waddington

GENEVA, Oct 2 (Reuters) - Deflation remains a threat to the world economy and the European Union and Japan cannot leave the United States to be the sole motor of global growth, the United Nations warned on Thursday. Growth in 2003 was unlikely to be much better than last year's weak 1.9 percent, well below potential, with the EU turning in some one percent and Japan far less, according to the U.N. Conference on Trade and Development (UNCTAD).

"There is a global glut in both labour and product markets, with too many goods chasing too few buyers and too many workers chasing too few jobs," it said in its Trade and Development Report, 2003.

"The world economy is facing a widening deflationary gap (excess of supply over demand) created by deficient global demand...Only coordinated expansionary policies among the leading economies can bring about an orderly rebalancing of economic relations," it said.

UNCTAD said consumer demand, buoyed by mortgage refinancing, had helped the United States avoid a prolonged recession, and noted that more optimistic forecasters were looking for a "long-anticipated" U.S. rebound later this year.

But this did not mean the threat of international deflation -- falling prices -- had vanished. "In our opinion, deflation is more of a threat than inflation, absolutely," said senior UNCTAD economist Richard Kozul-Wright.

Despite sizeable interest rate cuts by the U.S. Federal Reserve, investment had not recovered as expected and the labour market was in "its worst shape for some time".

Furthermore, there was a danger "imbalances and excesses" of the 1990s -- exploding levels of private and public indebtedness together with a huge trade deficit -- could lead to a "prolonged period of unstable and sluggish (U.S.) growth, with occasional surges as well as dips".

For a sustained improvement, developed states needed to act together. Europe should find ways to "exploit its greater scope for expansionary monetary and fiscal action to bolster growth".


DEEPEN DISCONTENT

UNCTAD, whose report was written before the collapse of world free trade talks in Cancun, Mexico, last month, also warned against putting too much faith in trade as a generator of growth.

"A sustainable expansion in trade and capital flows now depends on a rapid recovery of the world economy, rather than the other way round," it said.

Outside Asia, the developing world was also experiencing sluggish growth, and where economies were doing reasonably, their performance was often heavily dependent on producing and processing natural resources.

Latin America had little to show for two decades of economic reform aimed at price stability and encouraging the return of international capital after the debt crises of the early 1980s.

"Many countries are facing the same balance of payments and debt problems that had contributed to the earlier crisis," UNCTAD said.

The U.N. agency, a traditional critic of monetarism and neo-liberalism, said the difference between Latin America and Asia lay in the fact that the latter had used a wider range of macroeconomic, financial and trade policies.

"In much of Latin America and Africa, by contrast, big bang liberalisation has led to inconsistencies...that have skewed structural change and stunted technological progress," it said.



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