International Economic Outlook

By Simos, Evangelos Otto | The Journal of Business Forecasting, Spring 2007 | Go to article overview

International Economic Outlook

Simos, Evangelos Otto, The Journal of Business Forecasting



Despite adverse geopolitical factors, high oil prices that topped $75 a barrel, and rising interest rates, the world's output is now estimated to have advanced by 5.2 percent in 2006, the fastest pace of growth in the last 33 years. A distinctive feature of the current global business cycle is the key role that the economies of three countries played in driving demand and shaping supply in the global economy.

Of the industrial countries, the United States led the world in technological advancements that accelerated productivity while the U.S. consumer stayed on track at a five-year long buying spree. U.S. real GDP expanded in 2006 by 3.3 percent, contributing 13.5 percent to the world's output growth in combination with the size of the economy.

Of the developing countries, economic expansion in 2006 was predominantly robust in China and India, where real output is estimated to have increased by 10.5 percent and 8.7 percent, respectively, which is about twice the world's average growth rate. Given the relative economic size of the two most populous countries, measured by purchasing power parity (PPP) international dollars, their combined contribution to global economic growth hit an impressive 43.5 percent mark in 2006.

Since the worldwide recession of 2001, the three countries-the United States, China, and India-have emerged as poles of growth by contributing twothirds to the increase in the world's output in the last six years (see Figure 1). U.S. economic growth is forecast to slow down in 2007 and accelerate in 2008, amid the end of the housing correction and the lagging effects of stabilizing interest rates. However, acceleration in European and Japanese economic growth in 2007 will maintain the growth momentum among the industrial countries.

Although economic growth in China and India is forecast to decelerate slightly during 2007-08 as their growth cycle matures, they are expected to outperform the rest of the world and continue to be key drivers of the global economy. The baseline forecast calls for global economic growth to moderate to 4.7 percent in 2007 and 4.6 percent in 2008.

On the inflation front, growth in worldwide consumer prices is estimated to register 3.1 percent in 2006, the same as in 2005. The three poles of global growth have also substantially contributed to the decline of worldwide inflation. China and India have kept a lid on inflation by providing global competitive pricing for firms in industrial countries. In the United States, the advancements in productivity have kept unit labor costs in check despite rising wages. In addition, worldwide anti-inflation monetary polices have helped to end the acceleration in inflation rates despite higher oil prices. Over the forecast horizon, 2007-08, the worldwide inflation rate will slightly decelerate to 2.9 percent from 3.4 percent during 2005-06.

The volume of world trade in goods and services is forecast to go along with projected global demand patterns over the forecast horizon. Following acceleration to a growth rate of 8.9 percent in 2006 from 7.4 percent in 2005, growth in the volume of world trade is forecast to slow down to 7.5 percent in 2007 and bounce back to 8.1 percent in 2008.


The baseline forecast incorporates major findings of the World Economic Survey conducted by the German Ifo Institute and the Paris-based International Chamber of Commerce in the first quarter of 2007. About 1,000 executives from 90 countries have indicated that the world's economic climate slightly improved in the first quarter of 2007 and remained above its long-term trend. The recent overall reading of the worldwide survey is consistent with a growing global economy at a slightly faster pace than in the second half of 2006. The major findings of the first quarter's survey are as follows:

* Worldwide, executives evaluated the current situation, first quarter of 2007, favorably with overall economic conditions above satisfactory levels. …

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