Development of the international economy.(Economic Forecast: 2006-2008)

Worldwide Growth to Remain High

The recovery of the international economy is continuing. Despite unrest in the Middle East, soaring oil prices and rising interest rates, global GDP will grow by 5.0 percent this year. Except for 2004, when the rate was 5.3 percent, the forecast figure is the highest in three decades. In the period ahead, worldwide growth will slacken slightly as resource utilization becomes increasingly strained and monetary policy is tightened. But growth will remain high at 4.7 and 4.4 percent, respectively, in 2007 and 2008 (see Diagram 22).

The economies outside the OECD area are showing particularly rapid growth. Although the Chinese authorities are taking steps to dampen economic activity, the economy continues to expand at a high rate. GDP growth will be about 10 percent in both 2006 and 2007. In 2008 growth will slacken somewhat but will still be an impressive 8.7 percent (see Diagram 23). In India growth is expected to average more than 7 percent per year in 2006-2008.

In these countries as in much of the world economy, growth is being driven primarily by investment. In the economic downturn of 2001/2002, investment by firms dropped far too low in relation to their long-term needs for capital (see Diagram 24). The past two years have been highlighted by a cyclical recovery of investment. In the OECD area, growth in investment peaked in 2005, but it will still grow faster than GDP during the period 2006-2008. As before, the continued rise in investment will be fuelled by high business profits and low borrowing costs.

Household consumption is increasing more slowly, as is normal in a recovery phase. But with resource utilization on the labour market rising globally, household consumption will constitute an increasingly larger share of GDP growth.

No stimulus, however, can be expected from fiscal policy. During the period 2001-2003, fiscal policy in the OECD area was clearly expansionary, primarily because of a large expansion in the US. In 2004-2005 fiscal policy shifted to a slightly contractionary stance. For 2006, 2007 and 2008, a largely neutral fiscal policy is expected in the OECD area.

High global growth has gone hand in hand with surging world trade. In the first quarter of 2006, world trade was up by 12 percent compared to the same quarter in 2005 (see Diagram 25.) For the rest of the forecast period, growth is expected to average about 7.5 per year. This figure may be compared with the average growth rate of around 6 percent in the last 25 years.
Considerable Uncertainty on the Oil Market

Concern about future disruption of supply has caused oil prices to rise during the summer. Above all, the political unrest in the Middle East and Nigeria have contributed to higher prices. The price of oil was more than 73 dollars a barrel in July and was still around that level in mid-August
One reason why uncertainty about future supply has had a relatively strong impact on oil prices is that reserve capacity, i. e. unused production capacity, is not sufficient to compensate for a major loss of output.

In real terms, the price of oil is considerably higher now than in the mid-1970’s during the first oil crisis, but it is still somewhat below…

Source: National Institute of Economic Research

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