The Bank for International Settlements (BIS) said today the world economy was stuck in "an uncomfortable soft spot" with deflation and a weakening dollar new threats to an already stuttering recovery.
To ensure a long-term recovery, Asia and Europe would have to start pulling their weight because the United States had been a "disproportionately large source of global demand growth" for almost a decade, it said.
"To ensure the sustainability of a truly global expansion, more needs to be done to strengthen domestic demand growth in countries with healthy external balances," the Basel-based BIS said in its 73rd annual report.
The year to end March had been marked by economic disappointments and there was no clear evidence of a decisive improvement in macro trends.
The BIS, a forum for the world's central banks, said economic prospects for the United States were uncertain, Europe's potential had weakened and Japan's outlook was mixed.
Adding to the BIS's worries was the growing fear of deflation. Japan and China, where falling prices are already a reality, would suffer even more if their currencies rose against the dollar, but "disinflationary forces were evident almost everywhere," the BIS said.
Deflation on its own was not necessarily a bad thing, but combined with sharp asset price falls, strong resistance to wage cuts, already low or non-existent interest rates and a high level of indebtedness, it posed a challenge for policymakers.
The BIS said while a falling dollar was beneficial to the world's largest economy, the fact that US expansion was financed by Europe and Japan would mean those regions would be particularly vulnerable should the currency continue to slip.