Global Surveillance: World Economic Outlook: Imbalances, Oil Prices Cloud Strong Global Growth Prospects

International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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On the strength of higher growth estimates for China, India, and Russia and of increased optimism on Japan, the IMF has added 0.6 percentage point to its 2006 global growth projections in its latest World Economic Outlook. It now projects that the world economy will grow by 4.9 percent this year, compared with its projection of 4.3 percent last September.

In an April 19 press briefing, IMF Economic Counsellor Raghuram Rajan lauded the global economic performance (see chart), pointing out that 2006 would be the fourth consecutive year of growth above 4 percent and that growth has become more balanced regionally—a particularly welcome development. The world, he said, can honestly be told that it has “never had it so good.” Tight oil markets, widening imbalances, and mounting pressures on interest rates, however, keep risks tilted to the downside. Most troubling, he said, is the “growing implementation deficit.” Far too little is being done in far too many places, and Rajan worried that politicians all over the world were frittering away a golden opportunity to make the kind of adjustments that would allow their economies to keep pace with an increasingly integrated and more competitive world.

More balanced growth

For the advanced economies, 2006 holds the prospect of moderating growth in the United States, continued robust growth in Japan, and more traction in the euro area’s expansion.

In the United States, growth in the first quarter of 2006 is likely to have rebounded from the sluggish fourth quarter in 2005, and growth for this year as a whole is projected at 3.4 percent, a slight drop from last year’s 3.5 percent. Downside risks remain—notably uncertainties surrounding the continued financing of a widening U.S. current account deficit and a cooling of the housing market, where a 5 percentage point slowdown in the rate of appreciation in real house prices, for example, could lop 1 percentage point off U.S. growth, Rajan said. Over the medium term, bolder fiscal adjustment—with the IMF seeing higher taxes having to do most of the heavy lifting—with the ultimate aim of achieving budget balance (excluding social security) by 2010 will be a top priority if the country is to position itself to cope with future demographic pressures and contribute to a reduction in global imbalances.

In Japan, recovery is now well under way, with the economy projected to grow by 2.8 percent in 2006. Exports have done their bit to spur the rebound, but the real news is that the expansion is increasingly being driven by domestic demand, underpinned by rising employment, buoyant corporate profits, and positive credit growth. Near-term prospects may brighten further, particularly if private consumption gains momentum. Over the longer term, however, Japan’s capacity to sustain solid growth and address the needs of its aging population will depend on its ability to manage the transition to a new monetary framework, restore budget sustainability, and revive productivity growth.

As for prospects in the euro area, the WEO took heart from leading indicators that continue to suggest that the recovery is strengthening. Despite weak consumption data for the region, the IMF remains optimistic, Rajan said, that growth in the euro area “will pick up to about 2 percent in 2006 and the pickup will be broad-based.” The IMF chided the euro area, however, for making little progress on budget deficits. The region’s longer-term prosperity is inextricably linked to more ambitious steps to raise potential growth and boost employment through greater labor market flexibility. “More insecurity in the workplace may well be the price that has to be paid to obtain more security for the European way of life,” he said.

Still resilient

Global growth remains notably above trend, while inflation and long-term interest rates are unusually low.

(annual percent change unless otherwise noted)

Note: Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of purchasing-power-parity (PPP) weights unless otherwise noted.

1Average growth rates for individual countries, aggregated using PPP weights; the aggregates shift over time in favor of faster-growing countries, giving the line an upward trend.

2GDP-weighted average of 10-year (or nearest maturity) government bond yields less inflation rates for the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. Excluding Italy prior to 1972.

3Simple average of spot prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil.

Data: IMF, World Economic Outlook and staff calculations.

Asia stays strong

Emerging Asia’s growth kept up its scorching pace in 2005, at 8.2 percent, and is expected to ease only slightly to 7.9 percent in 2006. This is a full percentage point higher than the growth rate for 2006 projected in September. China should grow at a 9.5 percent clip in 2006. To sustain that high growth, however, China will need to rely more on boosting domestic consumption and less on investment and net exports. Plans to step up spending on health care and education and to develop social safety nets are welcome, Rajan said, but they will be most effective “if supported by financial sector reforms and more exchange rate flexibility.”

India continues to flex its muscles, too, and is projected to grow by 7.0 percent in 2006. The WEO commends the country for beginning to address its sizable infrastructure needs. But the urgent priorities going forward, Rajan said, are more flexible labor markets that will allow India to create labor-intensive sectors and increased investment in higher education, so that it can maintain competitiveness in skill-intensive industries.

Spreading the wealth

Over the past several years, low inflation, increased demand for commodities, and improved macroeconomic environments in many countries have helped spread the fruits of the global economy’s strong, sustained growth. “Most heartening,” observed Rajan, “is sub-Saharan Africa’s recent performance.” The WEO projects that the region will see real growth exceed 5 percent for the third year in a row (see table). Indeed, the projected growth of 5.8 percent in 2006 represents the region’s highest rate in 30 years.

For the Middle East and much of Central Asia, rising oil receipts are expected to propel continued solid growth in 2006 and swell current account surpluses. For these countries, the key challenge will be to channel oil receipts into productive investment and meet the employment needs of their large youthful populations.

Higher commodity prices have also helped underwrite a robust economic expansion in Latin America, where the WEO projects 4.3 percent growth in 2006—identical to its 2005 performance but 0.5 percentage point higher than the September estimate. Impressive fiscal discipline coupled with strong growth has helped spur a major reduction in public debt. However, debt is still high in a number of countries, and sustaining its downward trajectory will be one of the region’s chief priorities.

More balanced growthA greater number of countries and regions are now contributing to strong global growth.
Current projections
(annual percent change)
World output5.
Advanced economies3.
United States4.
Euro area2.
Newly industrialized Asian economies5.
Other emerging market and developing countries7.
Sub-Saharan Africa5.
Developing Asia8.
Middle East5.
Western Hemisphere5.

ASEAN-4 - Indonesia, Malaysia, the Philippines, and Thailand.

Data: IMF World Economic Outlook, April 2006.

ASEAN-4 - Indonesia, Malaysia, the Philippines, and Thailand.

Data: IMF World Economic Outlook, April 2006.

In Eastern Europe, growth has been strong and prospects continue to be good, but “high current account deficits and rapid credit growth in many countries need to be monitored closely,” Rajan said.

Pressures mounting

Strong growth prospects notwithstanding, pressures are mounting on several fronts. Plentiful global liquidity has helped hold down long-term interest rates and risk premiums, but the liquidity cycle appears poised to turn, and an expected reduction in corporate excess savings also seems likely to put upward pressure on real interest rates. Effectively, the world is seeing a return to normal after a period of extremely benign conditions, Rajan said. That is a completely natural transition, but policymakers will have to remain alert. Any shift carries risks, and this is particularly true “where asset prices are inflated.”

Finally, the WEO reiterated its call for a multilateral approach to resolving global current account imbalances. These imbalances will need to be adjusted, and sound risk management would seem to argue for a multilateral policy framework that puts in place policies that can support a smooth, private sector-led transition. Such an approach, Rajan said, could also reassure markets—and thus reduce the likelihood of abrupt and costly rebalances—and help quell rising protectionist sentiment that he called “a very real danger in the world today”

Copies of the April 2006 World Economic Outlook are available for $49.00 ($46.00 academic rate) each from IMF Publication Services. Please see page 128 for ordering information. The full text is also available on the IMF’s website (

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