World Economic Outlook Fastest growth in decades in 2004, but in 2005 oil prices will weigh

• Author: Marina Primorac
• Position: IMF, External Relations Department
• Pages: 295-296

Page 295

The United States, which led the way out of the global recession, recently hit a "soft patch," said Rajan. Fading fiscal stimulus and higher oil prices are weighing on consumption, so continued employment growth is essential. The measured withdrawal of monetary accommodation should continue. But on the fiscal side, despite recent revenue buoyancy, the IMF sees red ink stretching into the future. As for Japan, the IMF recently raised its growth forecast despite recent softness in that economy, Rajan announced. But it is not enough for Japan to simply emerge from its stagnation of more than a decade. The rapid aging of its population has raised the bar, and Japan now has to recover some of its past vitality, by subjecting its domestic and financial sectors to the same competitive forces that have made its export sector thrive.

The recovery in the euro area has gained momentum, Rajan observed, though growth there is still the lowest among developed regions and, especially in Germany, remains dependent on external demand. European leaders have enacted key reforms, but there are signs that people are experiencing reform fatigue.

Will China land?

Growth has been particularly strong in emerging Asia, Rajan noted, with China picking up speed again. "The question increasingly is not a hard or soft landing," he said, "but whether China will land at all. In its own long-term interests, we strongly believe it must land." India's growth will soften a bit because of the vagaries of the monsoon, and the country has to improve its infrastructure even while bringing overstretched government budgets back into balance

Elsewhere, Latin American growth has rebounded, with Brazil's reforms finally paying dividends, according to Rajan. Domestic demand has picked up across the region on the strength of improving confidence. But Latin America's problem has never been achieving growth; it has been sustaining growth. Reform efforts have to continue so that adverse debt dynamics do not play the spoiler as they have done so often in the past.

Higher oil prices are benefiting the Middle East as well as countries in the Commonwealth of Independent States. The critical task for all these countries, Rajan noted, will be to use their budgetary windfalls wisely, while diversifying sources of growth. Emerging Europe continues to thrive, with most economies experiencing rising domestic demand and strong export growth. But...