Slower Growth Expected for Global Economy

By THE ASSOCIATED PRESS
Published: April 13, 2005

Filed at 12:14 p.m. ET

WASHINGTON (AP) -- The global economy's growth is expected to slow this year, while still turning in a solid performance, as high energy prices weigh a bit on activity, the International Monetary Fund reported Wednesday.

After bounding ahead by 5.1 percent in 2004, the global economy is projected to grow by 4.3 percent this year, the IMF said in its latest World Economic Outlook. The forecast for 2005 is unchanged from an estimate the IMF released in September.

"The global economic expansion has remained broadly on track, evolving largely as expected," the IMF said. "Forward-looking indicators appear consistent with solid expansion in 2005, although rising oil prices are an increasing risk."

Next year, the IMF is forecasting the world economy to expand by 4.4 percent, slightly faster than the 2005 projection.

The IMF's forecasts are based on an assumption that world oil prices would average around $46.50 a barrel this year and $43.75 in 2006.

Spare oil production capacity will probably remain low, the IMF said. That, along with strong demand, will keep supplies tight. Thus, any unexpected supply disruption or change in demand could lead to gyrating prices.

"Not only can we not rule out price spikes, we cannot also rule out price plunges, " said Raghuram Rajan, the IMF's chief economist.

"Oil price volatility makes business more cautious about investing, especially in the oil sector itself where investment is needed throughout the production chain," he said. "In turn, low investment will continue to limit excess capacity, keeping volatility high, and perpetuating the vicious cycle."

For the United States, the IMF is predicting economic growth will increase by 3.6 percent this year, as well as next year. While that would be a moderation from the brisk 4.4 percent growth registered in 2004, it would still be considered healthy.

"The United States continues to hum," Rajan said.

The projection of 3.6 percent economic growth this year for the United States is up a tad from the IMF's previous estimate in September and is in line with forecasts made by other economists. The more moderate U.S. economic growth projection reflects a number of factors, including the toll of high energy prices as well as the Federal Reserve's interest rate boosts, private economists say.

In the United States, oil prices surged to an all-time high of $57.27 a barrel at the beginning of April. But they have retreated in recent days-- hovering above $51 a barrel on Wednesday.

China's economy, which grew by a blistering 9.5 percent last year, is expected to cool only a little. The IMF is projecting growth of 8.5 percent in 2005 and 8 percent in 2006.

"Global growth remains unduly dependent on the United States and China," the IMF said. "Growth in the euro area and Japan -- together accounting for nearly one-fourth of global output -- has once again been disappointing."

In the euro area -- Germany, France, Italy and Spain -- the economy is expected to grow by just 1.6 percent in 2005, the IMF said. That would be less than the IMF previously estimated for the region and would be down from a 2 percent increase posted in 2004. In 2006, economic output should improve somewhat -- increasing by 2.3 percent.

For Britain, economic growth should clock in at 2.6 percent this year and next, which would be slower than the 3.1 percent increase in 2004.

For Japan, the IMF is predicting economic growth of only 0.8 percent this year-- a big slowdown from the 2.6 percent increase registered in 2004. Japan's economy should expand by 1.9 percent in 2006.

Even with high energy prices, interest rates increases by the Fed in the United States as well as by other countries' central banks should keep inflation from becoming an immediate problem for the global economic expansion.

"Inflation is expected to remain moderate in the near future," the IMF said. Still, the situation bears close watching, it added.

Higher interest rates could cool the red-hot housing market in some parts of the world, Rajan said. However, in the United States, the housing market -- while displaying some mixed signals -- remains in good shape.