The world economy looks set for another year of robust growth. There are plenty of reasons to be optimistic that the impressive performance of the past few years will continue this year and possibly for the rest of the decade.
Having grown by an average of more than 3% a year so far this decade, the Noughties look set to be the world economy’s best decade on record, eclipsing even the golden years of the 1950s and 1960s.
There are risks, of course. Doomsayers continue to warn of a slump in the dollar, a renewed surge in the oil price or a collapse in the US housing market that could throw the world off course. They are right that the risks exist, but the world economy has proved its resilience admirably in recent years.
Who would have thought, for example, that the tripling of oil prices, combined with soaring inflation in the past three years, would fail to tip the world into a recession? In those three years, the world economy has grown by almost 5% annually — the fastest for more than 30 years. World stock markets are booming as investors show their confidence.
The main reason for optimism is that growth has broadened out from relying on the American consumer who, boosted by the ultra-cheap money and rising house prices of recent years, kept the world economy motoring while regions such as the eurozone and Japan were sluggish.
Now both of those regions, along with China and India and other emerging economies, are performing well. They should be able to withstand the slight slowdown that many analysts are expecting in the US. In short, the world is rebalancing.
The US economy, still by far the largest in the world, looks certain to slow this year. Its housing market slipped last year and the house price boom of recent years is a distant memory. But other parts of the US economy appear to have taken up the slack.
The Organisation for Economic Cooperation and Development (OECD) expects US growth to slow to 2,4% this year, from 3,3% in 2006. It expects a sluggish first half of the year before a rebound later in the year.
The eurozone, long the sick man of the world economy, turned in a surprisingly respectable performance last year, growing by about 2,6%. The OECD and International Monetary Fund expect growth to be closer to 2% this year and next.
China’s economy is likely to grow by 10% again this year, as it has done for many years, taking it to number four in the world economy ranking. It is now big enough to make its growth matter for the whole world. Taken together, emerging markets including India, Russia and Brazil now account for 70% of world growth. They accounted for 50% a decade ago. The world is much less dependent on the US than it used to be.
Japan, still the world’s second-largest economy, seems to be recovering steadily from its decade-long slump, although there are still concerns about whether its deflation problem has been solved in spite of rock-bottom interest rates of just 0,25%.
All in all, it is a pretty rosy scenario for the world. The main cloud on the horizon is the emerging crisis surrounding Iran.
If the country’s leadership continues to defy the United Nations with its nuclear programme and responds to sanctions by carrying out its threat to shut the Straits of Hormuz and prevent a fifth of the world’s oil getting to market, the price of crude could easily shoot through $100 a barrel and finally rattle the confidence of world stock markets. — Â