Mon, Jan 02, 2006 - Page 11 News List

Global economy enters 2006 in buoyant state


The world economy heads into the new year powered by vigorous growth in the US and Asia after showing its mettle in a battle with high oil prices in the course of the past 12 months.

"The period of strong global growth looks set to continue," predicted economists at Credit Suisse First Boston.

"The coming year looks like being the third in a row in which it runs above the sort of rate that we would have previously thought of as trend. On that basis, it could be the strongest three-year period for 30 years."

But for Global Insight chief economist Nariman Behravesh, "the big question out there in 2006 is about the nexus between the United States and Asia that has kept the global economy going."

"Will this nexus remain firm or will it be broken because of economic and political issues?" he said.

A toughening in US demands for Chinese currency reform, an increase in protectionist sentiment, or more seriously, a stand-off over Taiwan, could all undermine relations, he said.

Currency reform in China -- Washington maintains the yuan is undervalued -- is linked to another major risk for the world economy in 2006, namely the ever-widening US current account and trade deficits.

These deficits were expected to cause a significant fall in the US dollar in 2005 -- which never materialized -- but they continue to constitute the biggest imbalance threatening economic stability, economists say.

Other clouds on the horizon include a possible slowdown in the galloping US housing market and an increase in the consumer saving rate, which remains below historic levels in many countries.

Inflation, along with oil, was the dominant theme for much of the second half of 2005, and it is likely to continue to figure prominently in 2006 as central banks remain on their guard.

The global economy's resistance to inflation in 2005 proved a revelation for many economists, revealing fundamental structural changes witnessed in the last two decades as well as benign shifts in attitudes.

As oil surged from around US$43 per barrel at the start of the year to more than US$70 in August, many had forecast a slowdown because consumers were expected to feel the pinch from higher prices.

Judging by past experience, inevitable inflationary effects would require a tightening of interest rates, acting as a further brake on economic growth.

In fact, world economic growth is forecast to be about 3.2 percent in 2005 and inflation, which spiked in September, has retreated in recent months in line with an easing of oil prices towards US$60 per barrel.

"The most pleasant surprise and remarkable development in 2005 has been the resilience of the US and Asian economies to record high oil prices," Behravesh said. "In the past, if we'd have had this type of rise in oil prices, we'd have had weaker growth and higher inflation."

Looking ahead, Bank of America economist Lorenzo Codogno said, "the optimistic global outlook is based on improving fundamentals."

"One key trend has been the successful disinflationary policies of leading central banks and their heightened inflation-fighting credibility. This trend has resulted in stable low inflation in virtually all industrialized nations and a growing number of emerging nations."

World growth in 2006 is likely to continue, albeit it at a slightly slower rate than in 2005, pushed along by the US, China and India.

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