China, India and other developing countries need to take steps to protect themselves against a possible recession in the United States by lifting domestic demand, a United Nations agency report said on Wednesday.
UNCTAD, the UN Conference on Trade and Development, said that world economic output should rise 3.4 percent in 2007, compared to 4 percent last year, when foreign exchange shifts are factored in. "Most of this moderate slowdown can be explained by a slowdown in the United States economy ... due mainly to a reversal in the previously booming housing market," the annual Trade and Development report found.
It warned that a possible "outright contraction" in US house prices could crunch consumer demand in the world's largest economy, hurting developing countries where exports to the United States have fuelled recent fast growth. "If the present slowdown in the United States economy deepens and it slips into a recession ... the outlook will be rather bleak," the report said.
UNCTAD urged emerging nations to seek to boost their own demand to avoid big disruptions from weaker exports. It praised China's steps to increase the incomes of low-wage earners, including farmers, as a means to rally domestic consumption.
Turning to global economic imbalances, and in particular the large trade deficit the United States runs with China and other developing countries, the UN agency said Washington's campaign to have Beijing lift its currency peg may be misguided.
"Political pressure on China to float its currency may be counterproductive," it said, noting that China's interest rates are low, and that the yuan or renminbi may be used for "carry trades" where speculators swap assets for higher-yielding currencies, as has been done recently with the Swiss franc and Japanese yen.
"This would result in a depreciation of a renminbi, which would further increase China's competitiveness instead of reducing it - an outcome that would worsen global imbalances even more," the report said.
Washington blames the currency peg, which it says gives the yuan an artifically-low value, for the influx of Chinese goods into the country that has spurred its huge trade gap.
UNCTAD Secretary-General Supachai Panitchpakdi, who previously headed the World Trade Organisation, declined to comment on whether WTO negotiators would be able to successfully wrap up nearly six years of talks on a new global trade pact. But he cautioned developing countries against locking themselves into bilateral trade deals with rich nations.
"They come at a cost, particularly in limiting the policy opportunities within developing countries," he said. "Developing countries should rather pursue regional integration with close or neighbouring countries that are more or less at a similar level of development."