The world economy [November 2004]

Low, Kenneth (2004) The world economy [November 2004]. Quarterly Economic Commentary, 29 (3). pp. 13-16. ISSN 0306-7866

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The recovery in the world economy remains strong despite some soft data over the summer. There have been weak figures on US employment and confidence but recent indicators and the statement from the Federal Reserve point to relatively strong growth in the medium-term. Unlike some commentators we have not been too pessimistic about global growth. There has been a slight slowing of the Chinese economy but US GDP growth for 2004Q2 has been revised up from 2.8 per cent to 3.3 per cent. There are clear signs of global inflationary pressures due to higher oil prices and to capacity constraints (with the latter probably being the more important in the medium-term while oil prices have a more dramatic current effect). Japanese growth has been stronger than expected and we still expect strong growth for the Asian economies despite a slowdown in import demand in the Far East. World trade is forecast to grow at 8.9 per cent this year and 10.1 per cent next year. Global GDP growth is forecast to grow at 4.2 per cent compared to 3.9 per cent in 2003. It is also expected to be above 4 per cent until beyond 2006. The Federal Reserve has now increased interest rates three times to 1.75 per cent. The ECB have kept rates at 2 per cent and the Bank of Japan are expected to maintain their zero rate policy until 2005. The downside risks to the world economy are the same as reported in the last QEC, namely: fear of terrorist attacks in the West; higher oil prices; the imbalances between the main economies and exchange rate fundamentals.