updated 9/5/2007 12:16:27 PM ET 2007-09-05T16:16:27

The U.S. economy will slow sharply this year and fall behind growth rates in most of the world, according to forecasts in a U.N. report released Wednesday.

Major Market Indices

Woes in the housing market will drag U.S. gross domestic product for 2007 to a modest 2 percent growth, compared with 3.3 percent last year, the U.N. Conference on Trade and Development said in its flagship annual report.

For the first time since 2001, both the European Union, at 2.8 percent, and Japan, 2.3 percent, are predicted to have higher GDP growth than the United States.

China, at 10.5 percent, and India, 8.5 percent, should experience economic growth rates similar to the last three years, the report said.

Global growth, meanwhile, is pegged at 3.4 percent, down from 4 percent in 2006, largely because of the U.S. slowdown, the report said.

For now, the world economy is going through a “golden period,” Supachai Panitchpakdi, the former World Trade Organization chief now heading the U.N. agency, told reporters in Geneva.

High commodity prices continue to boost growth in developing countries, which accounted for a 37 percent share of global trade last year, the report said. A decade ago their share of trade was 29 percent.

Economies in Africa are predicted to grow by 6 percent, Latin America and the Caribbean by 4.7 percent, and ex-Soviet bloc states still outside the European Union by 7 percent.

“There might be some downward revision,” Supachai said.

“All this depends on the degree of adjustments coming out of the U.S. economy,” he said. Further economic turmoil from risky lending practices — like subprime mortgages for borrowers with weak credit histories — was possible, Supachai said.

Holger Flassbeck, a senior official at the agency, said large-scale currency speculation was also a threat to financial markets and, by extension, the global economy.

Banks and hedge funds have been taking advantage of widely differing interest rates across the world in recent years to borrow large sums of Japanese yen or Swiss francs and invest them in high-yield accounts elsewhere — a practice known as “carry trade.”

Sudden changes in exchange rates could cause panic selling and destabilize currency markets, creating a domino effect that would be worse than the subprime crisis. That could affect entire economies, Flassbeck said, adding that Japan was particularly vulnerable.

Analysts said the possibility of such an economic catastrophe was minimal.

Investors are already showing greater caution on currency deals, said Charles Goodhart, emeritus professor of banking and finance at the London School of Economics.

“When people get increasingly concerned about risk, as they have done recently, then they tend to close out their carry trade positions,” he told The Associated Press, noting that the value of the yen has been rising amid risk concerns.

Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt, concurred.

“The unwinding of the yen carry trade is something that has already happened,” he said.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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