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US ballooning trade imbalances threatens world stability { April 7 2005 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2005/04/07/business/worldbusiness/07econ.htmlhttp://www.nytimes.com/2005/04/07/business/worldbusiness/07econ.html
April 7, 2005
Growth Pace Worldwide Is Expected to Slow in '05
By EDMUND L. ANDREWS and KEITH BRADSHER
WASHINGTON, April 6 - The World Bank and the International Monetary Fund predicted on Wednesday that global economic growth would slow significantly in 2005, and they warned that the United States' ballooning trade imbalances could disrupt world markets if foreign investors stop buying American debt.
"Global expansion has become less balanced, with global growth continuing to be unduly dependent on the United States and China," said Rodrigo de Rato, managing director of the International Monetary Fund, in a speech at Georgetown University here.
Warning against "complacency," Mr. de Rato pointed to a number of "downside risks" that could catch investors by surprise. Those risks included higher oil prices, rising fears of inflation and, not the least, the United States' large and growing indebtedness to the rest of the world.
"The demand for U.S. assets is not unlimited," Mr. de Rato warned, noting that bond markets were badly shaken last month by the mere hint that Asian central banks might begin to reduce their holdings of United States Treasury securities.
"A sharp reduction, or a reversal, of capital inflows could entail serious consequences for currency and capital markets," Mr. de Rato said.
The United States trade deficit climbed to a record of $617 billion in 2004, nearly 6 percent of gross domestic product, and most analysts expect it to keep climbing because American economic growth is faster than that of Europe and Japan. America's current-account deficit, the broadest measure of trade and capital flows, soared to a record of $666 billion.
In a separate report, the World Bank said that global growth had probably "peaked" at 3.8 percent last year and would probably slow to about 3.1 percent this year. Among the reasons, it said, were rising interest rates, high oil prices and less stimulative fiscal and monetary policies in many countries.
The Asian Development Bank, a sister institution of the World Bank and the fund, predicted that the developing nations of Asia would continue to enjoy strong growth for the next three years and have largely put the financial crises of the late 1990's behind them.
Developing countries enjoyed rapid growth last year, and many benefited from low interest rates as global investors looked for places to earn higher returns. But the World Bank warned that developing countries were at risk from "disorderly" changes in exchange rates and unexpected surges in interest rates.
The Asian bank's chief economist, Ifzal Ali, said that high oil prices, slowing demand in industrialized countries and avian influenza all posed risks to the bank's forecast.
But strong business investment and a quadrupling of central bank reserves in the region since the crisis have insulated countries from economic shocks, he said in releasing the bank's annual forecast at a news conference in Hong Kong.
The economies of Asian developing countries expanded by 7.3 percent last year and can be expected to grow 6.5 percent this year, 6.6 percent next year and 6.9 percent in 2007, the bank said.
Recent signs of economic weakness in the European Union and Japan, together with rising inflationary pressures and the likelihood of higher interest rates in the United States, could result in a sharp slowing in Asian exports of manufactured goods this year, Mr. Ali warned. But other sectors are doing well, he said, pointing to increased government spending on public works and strong investment by companies.
Mr. Ali said that it would be desirable to see China rely more on market tools like a more flexible exchange rate or higher interest rates to manage its economy, but offered few specific recommendations. Its economy seems to be slowing this year after torrid growth over the last several years, he said. Still, the bank said it expected the Chinese economy would expand 8.5 percent this year after growth of 9.5 percent last year.
Some of the biggest risks to Asia are the hardest to estimate, he cautioned, adding that "what we have seen emerging with avian flu casts a huge shadow on the region."
Edmund L. Andrews reported from Washington for this article and Keith Bradsher from Hong Kong.
Copyright 2005 The New York Times Company
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