World Economic Outlook: World economy blossoming: WEO forecasts 4.6 percent growth for 2004

• Pages: 130-132

Page 130

Global recovery has strengthened and broadened, led by the U.S. and Asia (real GDP, percent change from four quarters earlier)

[GRAPHICS ARE NOT INCLUDED]

Amid multiplying signs of a vibrant global economy, the WEO raised its forecast for global growth in 2004 by about 0.5 percentage point to 4.6 percent, and projected growth of 4.4 percent in 2005, Rajan said, noting that "if all goes as expected, we are in for the best two-year period in over a decade."

Among the industrial countries, the United States has led the way. Most forward indicators point upward, and the WEO projects U.S. growth for 2004 at 4.6 percent. Japan's recovery also shows remarkable strength, Rajan observed, with strong external demand, notably from China, accompanied by rising investment and, recently, a pickup in consumption. The WEO projects Japanese GDP will grow by 3.4 percent in 2004-the highest rate since 1996. In response to a question, Rajan said Japan had moved from export-led growth to investment, and there were signs of consumption picking up, which led the WEO team to believe that there may be greater strength in this recovery than in the false dawns of the last decade. There has been a fair amount of restructuring on both the corporate and banking sides, and this has helped Japan. At this juncture, however, getting rid of deflation remains a fundamental macroeconomic objective, and the WEO counsels Japan to keep its expansionary monetary policy in place until deflation is history.

The euro area, however, is still experiencing wintry conditions, Rajan said, with prospects much less favorable than in the United States and Japan. Only a modest expansion, of 1.7 percent, is projected for the euro area in 2004. Rajan told reporters that there might be room for a further interest rate cut by the European Central Bank, though such a step would not perform magic on the region's economies. Other important steps- notably, structural reforms-are critical.

Strong growth in emerging Asia

Moving to emerging markets and developing countries, Rajan pointed to the particularly strong performance of emerging Asia, where China's growth-projected to be 8.5 percent in 2004-has been key. Asked whether the IMF had been aggressive enough in encouraging China and other Asian economies to move to more flexible exchange rates, Rajan underscored that the IMF had been pointing out that more...