The global economy, which has coped amazingly well with fallout from natural disasters and lofty energy prices, is expected to pick up a little more speed in 2006 and log another year of brisk growth.
Still, risks remain — notably regarding the future direction of already surging oil prices, the International Monetary Fund (IMF) indicates in its latest World Economic Outlook, released on Wednesday.
The world economy expanded by 4,8% last year and is projected to grow by 4,9% this year. Last year’s performance actually turned out better than the IMF had predicted, and the IMF’s forecast for 2006 was upgraded.
Buoyant activity in China, India and Russia together accounted for two-thirds of the upgrade, the IMF said. In addition, the recovery in Japan, the world’s second-largest economy, is well established and growth is picking up in the euro zone, the IMF says.
Forecasts for these countries rose by about one full percentage point for 2006, and by almost that much for 2007.
In the IMF’s previous forecast, released in September, the institution estimated that global economic growth would clock in at a respectable 4,3% in 2005 and 2006.
For the United States — the world’s largest economy — the IMF is predicting economic growth will increase by 3,4% this year and 3,3% next year. Those projections would mark a slight slowing from last year’s 3,5% growth, but would still be decent.
If the IMF’s global forecast for this year turns out correct, it would mark the best performance since 2004, when world economic growth bounded ahead by 5,3% — the best showing in three decades.
”Notwithstanding higher oil prices and natural disasters, global growth has continued to exceed expectations,” the IMF says. A devastating earthquake and tsunami hit Asian countries at the end of 2004. Hurricane Katrina wreaked havoc on Gulf Coast communities in the US, catapulting oil and gas prices.
”Looking forward, the baseline forecast is for continued strong growth, although risks remain slanted to the downside,” the IMF says.
One of the biggest risks is the possibility that energy prices will move even higher, causing consumers and companies to turn cautious and tighten their belts, a development that would slow overall economic activity.
In the US, oil prices closed at a record high of $71,35 a barrel on Tuesday.
Thus far, the impact of elevated oil prices on the global economy ”has been more moderate than generally expected”, in part because investors and businesses feel confident that central banks will make sure inflation doesn’t get out of control, the IMF indicates.
But looking ahead there are reasons for concern because spare oil production capacity is still very low — making the market vulnerable to shocks, the IMF says.
”Indeed, with the recent increase in geopolitical uncertainties in the Middle East, options market data suggest risks are slanted to the upside, with a 15% probability of oil prices spiking above $80 a barrel by mid-2006,” the IMF report says.
Against this backdrop, there’s a threat that any further jump in oil prices might push up the prices of other goods and services, fanning inflation.
At this point, though, the economic outlook for next year is still good. The IMF is forecasting the global economy to grow by 4,7% in 2007.
Many economists believe that a slowing housing market will be a main factor in the expected moderation of economic growth in the US this year.
The housing market — which has posted record-high home sales for five years in a row — has been an important contributor to the US economy’s good economic health. Hefty gains in home values also have made some Americans feel more wealthy and thus inclined to spend, which has supported overall economic activity in the US.
Elsewhere in the , the IMF says China, which saw its economy grow by a blistering 9,9% in 2005, will probably see another hot year, with growth steaming ahead 9,5% this year. Next year, China’s economy should expand by 9%.
China’s rapidly growing economy, its growing appetite for oil and its trade practices have heightened tensions in the US.
With the US trade deficit with China hitting a record $202-billion last year, the Bush administration is pressing Beijing to take steps — notably revamping its currency regime — to narrow the gap. Chinese President Hu Jintao meets President George Bush on Thursday.
In other areas, the IMF projects growth in the euro zone to do better this year — climbing by 2%, up from 1,3% growth in 2005. Next year, economic activity should clock in at 1,9%.
Japan’s economy, which grew by 2,7% in 2005, should expand by 2,8% this year. Growth, however, will moderate to 2,1% next year. — Sapa-AP