The World Economy

National Institute Economic Review, July 2005 | Go to article overview
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The World Economy

* Global GDP growth will slow from 5.1 per cent in 2004 to 4.2 per cent in 2005; world trade growth will slow from 9.1 per cent to 6.3 per cent.

* The oil price is expected to remain above $50 a barrel, although in real terms it is well below the highs of the early 1980s.

* Nearly 25 per cent of the deterioration of the US current account since 1997 can be attributed to net trade in petroleum products, and reflects the oil price.

* A 10 per cent revaluation of the Chinese renminbi would have little impact on the US current account deficit.

* Rapid real house price growth will continue to support US housing investment in 2005 and 2006.

Global growth rose well above trend in 2004, and we expect a marked slowdown in most major economies this year. Nonetheless, world GDP is expected to expand by a robust 4 1/4 per cent in both 2005 and 2006. World growth remains unbalanced; the US will expand by 3.9 per cent this year, supported by rapid real house price growth and housing investment, while the Euro Area and Japan will grow by 1.5 and 1.4 per cent respectively.

Strong global growth has continued to put upward pressure on oil prices, which are expected to remain above $50 a barrel throughout our forecast horizon. This, in turn, raises the global inflationary outlook, and average OECD inflation will rise to 2 per cent this year and 2.3 per cent in 2006. Import volumes in major oil producing nations have outstripped export volumes by a comfortable margin since 2002. This points to rapid recycling of oil revenues and suggests that the oil price rise will have a minimal impact on world growth.

The euro effective exchange rate has dropped by 5 per cent since the beginning of the year, reinforcing inflationary pressures in the Euro Area. This will add 0.2 to 0.4 percentage points to Euro Area inflation in 2005 and 2006, and the harmonised consumer price index will rise by 2.

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