UNITED NATIONS, Jan. 10 (UPI) -- The world economy is expected to decelerate in 2007, with the growth of world gross product down to 3.2 percent this year from the 2006 estimate of 3.8 percent, the United Nations said Wednesday in its annual "World Economic Situation and Prospects 2007" report.
The United States will be "the major drag for this global slowdown," said the 155-page report, 35 pages of which were graphs. Domestic growth is expected to soften on the back of a weakening housing market to a rate of 2.2 percent in 2007.
"That is a 1 percentage point less than last year," said Undersecretary-General Jose Antonio Ocampo, head of the Department of Economic and Social Affairs, told reporters at U.N. World Headquarters in New York at the report's release. "Other developed countries, however, will not significantly replace the U.S. engine as they are also expected to slow down this year."
The report said growth in Europe is forecast to slow to around 2 percent and in Japan to below 2 percent in 2007.
It also warned of substantial "downside risks associated with the possibility of a much stronger slowdown" of the U.S. economy.
But in the developing countries and economies in transition there was an "exceptionally strong economic performance during 2006, reaching average growth rates of 6.5 and 7.2 percent, respectively," said the report, produced by DESA, the U.N. Conference on Trade and Development and five U.N. regional commissions.
It said growth is expected to remain robust in 2007, with a mild moderation of 5.9 percent for developing countries and 6.5 percent for economies in transition, such as in countries formerly composing the Soviet Union.
"Among developing countries, sustained high growth in China and India has engendered more endogenous growth through increasing South-South trade and financial linkages," the report said.
"This is reflected in, among other things, continued strong demand for and higher prices of energy and primary commodities," it said. "Buoyant commodity prices benefit many developing countries and also the economies in transition, especially the Commonwealth of Independent States" or most of the former communist countries.
"The performance of the least developed countries also remains remarkably strong, averaging nearly 7 percent in 2006," said the report. Growth in the poorest countries is expected to remain equally strong in 2007.
Notwithstanding the improvement in both their domestic economic conditions and stronger inter-regional linkages, most developing countries remain vulnerable to any slowdown in the major developed economies and to the volatility of international commodity and financial markets, the report said.
As part of its study, the report also looked at inflation, finding such rates hit the headlines in many places last year.
"Most of the increase is attributable to first-round effects of higher oil prices," the report said. "So far, there has been only limited pass-through of higher energy prices into core inflation. Inflationary pressures are expected to moderate in 2007 in view of the retreat of oil prices in the latter part of 2006, the expected slowdown in global economic growth and the tighter monetary policy stance in many economies.
"Exceptions include a few countries in Africa, which have experienced a sharp increase in inflation owing to food shortages, currency depreciation and/or stronger pass-through of higher oil prices to producers and consumers," the report said.
The possibility of a more severe downturn in housing markets represents a significant risk to the U.S. economic outlook.
"A number of economies have witnessed substantial appreciation of house prices over the past decade, and the associated wealth effects have contributed to solid economic growth rates," the report said. "Reversal of the process may thus lead to significant negative fallout for world economic growth.
"Various indicators measuring the performance of the housing market in the United States show a significant recession in activity in 2006 -- a reduction of close to 20 percent in recent months," said the report.
"While the baseline forecast assumes a mild adjustment in the housing market, and hence a moderate slowdown in the economy, an alternative, more pessimistic scenario shows that a more severe decline in house prices in the United States would not only undercut its own growth to a pace below 1 percent in 2007 but also substantially reduce economic growth in the rest of the world by more than 1 percentage point.
"In addition, a collapse of house prices in major economies would provoke a crisis in the mortgage markets and set in motion a deflationary adjustment in the global imbalances, enhancing the risk of a major upheaval in financial markets," said the report.
