Global Economic Expansion Rolls on into 2006

Article excerpt

The global economy is forecast to grow steadily in 2006, driven mainly by the United States and China. Latin American economies should sustain their momentum while the euro area is likely to improve on its subpar 2005 performance. High energy prices will remain the greatest threat to the positive global outlook. Forecasts for 2006 project economic growth outside the United States to be about 3.4 percent, similar to 2005's estimated 3.3 percent growth.

Energy prices remain high and volatile

The price per barrel of West Texas Intermediate crude oil, a global benchmark price, was approximately $60 at the end of October, a rise of 42 percent since the end of 2004 (see the chart). In an effort to keep inflation in check, several foreign central banks, including the Bank of Canada and the European Central Bank, have begun to tighten monetary policy.

According to the International Monetary Fund's (IMF) World Economic Outlook, average consumer prices in developed countries (excluding the United States) ate forecast to rise only 2 percent in 2006, down from 2.2 percent in 2005 (see the table on page 7). In developing countries, inflation should average about 4.5 percent in 2006, down from 5 percent in 2005.

Demand for exports boosts Western Hemisphere

In Canada, strong growth continues to be driven primarily by robust domestic consumption and strong demand for the country's exports. The outlook for 2006 is upbeat, with the IMF projecting 3.2 percent growth, higher than the 2.9 percent estimated in 2005.

Latin America continues to benefit from strong commodity prices, especially for oil and metals. In many Latin American countries, increased export revenues have generated trade surpluses, which, along with conservative fiscal policies, have reduced the public debt burden. For example, both Colombia and Mexico have serviced their external debt through the end of 2006.

With this solid base, the economic outlook is positive for much of Latin America. But the possibility that commodity prices could decline sharply adds some downside risk to the outlook. In addition, the 17 presidential and legislative elections slated for next year, the most since 1994, could cause economic volatility. The IMF projects the region's real economic growth to be 3.8 percent in 2006, only 0.3 percentage points lower than in 2005.

Outside Japan, Asia continues to boom

China has become an increasingly important player in the global economy, especially in Asia. Strong demand for its exports continues to support Chinas economy. The IMF estimates Chinese economic growth reached 9 percent in 2005 and forecasts 8.2 percent growth in 2006.

The main challenge for China will be maintaining strong growth while balancing domestic consumption with export growth and gradually adopting a more flexible currency exchange rate. In July 2005, the People's Bank of China, the central bank, announced its first step toward a more flexible exchange rate policy by revaluing the renminbi by 2. …