World economic outlook steady, but with risks

AuthorMarina Primorac
PositionIMF External Relations Department
Pages281-293

Page 281

Despite soaring oil prices (which reached a new nominal high of $65 a barrel in late August) and the devastation wrought by Hurricane Katrina, the IMF's September 2005 World Economic Outlook (WEO) forecasts global growth in 2005 and 2006 at a healthy 4.3 percent annually. But the WEO sees a higher risk of slower growth, because of the oil-market situation- where a further substantial price increase cannot be ruled out-and increased global current account imbalances.

Page 292

Encouraging WEO forecast tempered by increased risks

The IMF's latest World Economic Outlook (WEO) sees global growth at a healthy 4.3 percent for both 2005 and 2006 in spite of rising oil prices, but cautions that its new projections are subject to increased downside risks-risks that growth will turn out lower than projected. Briefing the press on September 21, Raghuram Rajan, Economic Counsellor and Director of the IMF's Research Department, pointed to three chief areas of concern: the excessive dependence of global demand on consumption; the elevated level of asset prices, especially for housing; and high and volatile oil prices.

Some have argued that there is a global savings glut, but this is misleading, Rajan said, because the true problem is that in many parts of the world there is too little investment. He saw the current global economic situation as originating in a series of financial crises-in Japan, in emerging markets, and in the information technology (IT) sector-that were triggered by excessive investment. Investment has subsequently fallen off sharply, recovering only tentatively since 2002.

Policy responses have differed considerably across countries. In industrial countries-especially the United States and other Anglo-Saxon countries-low interest rates and expansionary budgets have led to consumption- or credit-fueled growth.

Government savings are down, particularly in the United States and Japan, and household savings have fallen in countries experiencing housing booms. By contrast, emerging markets drew lessons from their crises and tightened policies so that they now have fiscal surpluses and have brought inflation down.With corporations cautious about investing and governments similarly prudent about expenditure, growth has become export led, and many emerging markets have been running current account surpluses for the...

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