World economy on thin ice - U.N.

The world economy is "teetering on the brink" of a severe downturn and is expected to grow only 1.8% in 2008, the United Nations said in its mid-year economic projections Thursday.

That's down from a global growth rate of 3.8% in 2007, and the downturn is expected to continue with only a slightly higher growth of 2.1% in 2009, the U.N. report said.

The mid-year update of the U.N. World Economic Situation and Prospects 2008 blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter, which is expected to "continue to be a major drag for the world economy extending into 2009."

But the U.N. said developing countries will suffer as badly: They should grow by 5% this year and 4.8% next year, compared to a robust 7.3% in 2007, the report said.

The U.N. economists said the deepening credit crisis in major market economies triggered by the U.S.-led slump in housing prices, the declining value of the U.S. dollar, persistent global imbalances and soaring oil and commodity prices pose considerable risks to economic growth in both developed and developing countries.

"The baseline forecast projects a pace for world economic growth of 1.8% in 2008," the U.N. report said.

However, it said the final figure will largely depend on developments in the United States.

Global growth this year could fall to 0.8% if the U.S. subprime mortgage market turmoil has a more serious impact on developing countries and countries in transition, the U.N. report said.

But if the monetary and fiscal measures the U.S. government has taken to stimulate the economy - including tax refunds and lower interest rates - boost consumer spending and restore confidence in the business and banking sector, the world economy could only slow to 2.8% growth this year and 2.9% in 2009, it said.

The report, prepared by the U.N. Department of Economic and Social Affairs, forecast that U.S. economic growth will decline from 2.2% in 2007 to -0.2% this year, with only slight recovery in 2009 to 0.2% growth.

"At issue is how deep and long this contraction will be," the report said. "As the housing slump continues and the credit crisis deepens, a broad array of ... indicators are already hinting at a recession."

It cited a decline in U.S. employment, consumer confidence at its lowest level in a decade, household spending growth slowing sharply and business equipment spending slowing alongside large inventories of housing and a 30% decline in residential investment.

This strongly suggests "that the implosion of housing activity will not stabilize until 2009," the report said.

As for other developed countries, the U.N. forecast that Japan's economic growth will decline from 2.1% in 2007 to 0.9% in 2008 and that Western Europe's growth rate will drop from 2.6% last year to 1.1% this year.

Despite the slowdown in global economic growth in 2008, the U.N. said global inflation is expected to accelerate this year to 3.7%.

The report said the recent sharp rise in commodity prices and the continued rise in oil prices are key factors spurring inflation along with higher wages.

The growth of world trade also slowed from 7.2% in 2007 to 4.7% in early 2008, largely due to weak U.S. demand for imported goods, it said.