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The slowdown in global economic growth has "begun to bottom out" and the world economy appears set for "solid expansion" in 2005 led by the United States and China, the International Monetary Fund (IMF) has said.
World gross domestic product (GDP) will rise by 4.3 per cent this year and 4.4 per cent in 2006 as the expansion "remains broadly on track," the IMF reported in World Economic Outlook, its most comprehensive analysis of world trends. The forecast for 2005 is the same as the one the IMF made in September and compares with growth of 5.1 per cent in 2004.
Growth in the United States, the largest economy, and in China, the world's fastest growing major economy, as well as in emerging market countries, has been stronger than earlier forecast, while growth in Europe and Japan has been weak. Global growth in 2005 is being supported by favourable interest rates, improving corporate balance sheets, a gradual rise in employment and a strong economy in China, the IMF said in the report.
After averaging about 6 per cent in late 2003 and early 2004, global economic growth moderated, "reflecting both a return to a more sustainable pace of expansion and the adverse impact of higher oil," the IMF said in its report yesterday.
"They're calling for a soft landing in the global economy," Kenneth Rogoff, the IMF's chief economist from 2001 to 2003 and now a Harvard University professor, said in an interview. Oil is more than US$20 a barrel higher than two years ago and "the effects of that will be working their way through the system and have to cut growth in 2006."
Economic expansion may be endangered by its unbalanced nature, "significant tightening" of financial market conditions or further sharp increases in oil prices, the IMF said, even as its outlook projects a decline in oil prices by 2006.
Average oil prices will begin to taper, rising by 23.3 per cent in 2005 before falling by about 5.9 per cent in 2006, the outlook said. Prices rose by 30.7 per cent in 2004, and the IMF in September had predicted prices would remain level on average through 2005. The IMF said yesterday that with excess capacity staying low, oil prices would remain volatile.
"Even as demand from developing countries has increased, investment has not kept pace, resulting in very limited excess capacity," IMF Chief Economist Raghuram Rajan said at a news conference in Washington yesterday. "Not only can we not rule out price spikes, we cannot also rule out price plunges if volatile developing country growth tanks."
Timothy Evans, a senior energy analyst at IFR Markets in New York said oil importers like the United States, Japan, China and India are "naturally harder hit."
Still, the IMF's view of the economy suggests "the overall impact of high oil prices has not been that devastating when it comes to overall GDP," Evans said.
Much of this year's economic growth will be fueled by a 3.6 per cent rate of increase in the United States and an 8.5 per cent rate in China. That is up from a forecast made six months ago for growth of 3.5 per cent in the United States and 7.5 per cent in China. The IMF lowered its projections for most of the other advanced economies including Germany, France and Japan.
"We see an increasing divergence in growth across regions," Rajan said. "The expansion continues to be overly dependent on the United States and emerging Asia, while we still await a sustained recovery in the euro area and Japan."
This year will be a good year for global growth, "but not a great year," said Nariman Behravesh, chief economist at Global Insight Inc, an independent economic research firm in Lexington, Massachusetts.
"The United States and China are still the engines of growth and the weak spots are the euro zone and Japan," Behravesh said.
In a separate forecast yesterday, the Organization for Economic Co-operation and Development (OECD), which groups most of the world's industrialized countries, is cutting its global growth estimates for this year and next because of weaker-than-expected economies in Japan and Europe, a draft of its forecast showed.
The Paris-based OECD expects expansion of its 30 member nations of 2.8 per cent this year, down from a November forecast of 2.9 per cent and May's 3.3 per cent prediction. When asked about the disparities with the IMF's stronger projections, Rajan said in an interview that the OECD focuses more on rich nations, while the IMF includes the contributions of emerging market nations, with each methodology painting a different picture.
"Ours is not an optimistic tone, it's hopefully a tone which says 'look there is a central forecast of reasonable growth but it is surrounded by risk,'" Rajan said of the IMF's forecast. "The second difference is that when we calculate world growth, we do it by purchasing power parity. We are predicting very strong growth for the emerging markets."
The OECD is heavily weighted towards the United States and Western Europe and excludes China and India, the fastest-growing major economies, where the IMF forecasts growth of 8.5 per cent and 6.7 per cent respectively.
(China Daily April 15, 2005)
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