Somewhat slower global growth in 2005
Notwithstanding the gathering worries among some commentators about the high oil prices and the faltering of the boom in eastern Asia, the global economy is expected to continue steadily (if less steeply) on its upward path during 2005. Interest is not expected to become a burden because rates are not expected to move significantly. A declining dollar becoming an appreciable inflationary factor in the United States could even represent a slightly deflationary risk in other major economies such as Europe. In the eyes of the OECD and the IMF, the opposing economic currents would broadly cancel one another out at the global level. The IMF’s economists anticipate an increase in gross world product of 4.3 % in 2005.

Currently, the United States’ twin budget and current account deficits are proving to be a drag on the global economy. This is compounded by the impact of a decline in consumer demand from U.S. households. Nonetheless, high public spending should still provide a platform for U.S. economic growth in 2005. The OECD therefore expects 3.3 % growth in the United States during 2005.

Nor is the increase in the price of oil likely to leave the economically dynamic countries of eastern Asia altogether unscathed in 2005. The IWF expects 2005 growth in China to be 7.5 %, which is less than in 2004. The deceleration effect will be stronger in Japan according to the OECD’s estimates. It expects the Japanese economy to grow just 2.1% in 2005. However, the Japanese central bank expects the economy to have climbed out of the dip, which is primarily caused by slower export growth, by the end of 2005. The combined economies of eastern Asia will grow 4.7 % according to the annual Fall Report published by the major German economics institutes.

For 2005, the Fall Report predicts 2.3 % growth in Europe. That forecast is comparatively cheerful because most raw materials are priced in U.S. dollars, and while those dollar prices may increase, the eurozone countries are expected to need fewer (strong) euros to buy the required dollars. But Europe is not immune to cyclical risks: Private spending remains flat and public purse strings are tight in the eurozone. It remains to be seen how big an impact the higher price of oil and slower global growth will have on exports.

Once again, Germany can expect to be positioned well to the rear in the march for growth. The forecasts are relatively consistent: The OECD predicts 1.4 %, the Fall Report 1.5 %, and the German government 1.7% growth in Germany in 2005. The next phase of the German tax reforms can be expected to help growth by encouraging consumer spending, but exports may be encumbered by the loss of momentum in the global economy. Analysts see oil price movements as the most significant unknown quantity.