The World Economy

Anonymous

National Institute Economic Review, 2005, vol. 191, 8-30

Abstract: Growth in the world economy slowed somewhat during 2004 as the US, China and Japan all approached full capacity, and the second and the third quarters of 2004 saw relatively lower growth in these economies. We anticipate that with well managed macroeconomic policies growth should slow as any economy reaches full capacity, but we do not see these developments as signs indicating a sustained and noticeable slowing of the world economy. We expect that world growth will slow from a peak of 4.5 per cent in 2004 to around 4 per cent in 2005 and 2006. Growth appears to be robust in Latin America and in the former Soviet Republics, and domestic demand appears to be strong in the majority of members of OPEC. Growth in the Euro Area slowed noticeably in the third quarter of 2004, partly as a result of the impact of the sharp rise in the oil price, which also affected growth in other regions, but there is mounting evidence that domestic demand is weak. Our estimates of the output gap in the US, the Euro Area, Japan and China suggest that there is only limited spare capacity available in the world economy, and that much of it is located in Europe. Given this, we anticipate that global inflationary pressures will not moderate and that OECD inflation will rise from less than 2 per cent in 2002 and 2003 to above 2 per cent in 2005 and 2006.

Date: 2005
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