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29 September 2004

IMF Projects Broad Surge in 2004 Economic Growth Rates

Global economy expected to cool off in 2005 due to higher oil prices

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- The rate of global economic expansion in 2004 could hit a 30-year record but will likely slide in 2005 as a result of higher oil prices and other factors, the International Monetary Fund (IMF) says.

"Unless events take an awful turn," global output will grow 5 percent in 2004, 0.3 percentage points faster than forecast in April, the IMF said in its semiannual "World Economic Outlook" report published September 29.

Even though the United States continues to lead the global expansion, the U.S. economy experienced a slowdown in the second quarter of 2004, prompting IMF forecasters to lower its U.S. growth projections from 4.6 to 4.3 percent for 2004 and from 3.8 to 3.5 percent for 2005. The IMF said that the slowdown is most likely to be temporary although U.S. economic prospects will continue to depend on a "solid" rebound in employment.

"This is a soft patch, not a sinkhole," said Raghuram Rajan, the IMF's chief economist, who briefed reporters on the same day.

The U.S. Commerce Department said September 29 that U.S. gross domestic product (GDP) grew in the second quarter at an annual rate of 3.3 percent rather than the 2.8 percent it estimated in August. The revised figure is still below the 4.5 percent rate in the first quarter.

For 2004 the IMF projected 9.0 percent growth for China, 4.4 percent for Japan and 2.2 percent for the eurozone.

Rajan said that the 2004 economic recovery has broadened with all regions registering strong growth. The forecasts for developing countries range from 4.6 percent for sub-Saharan Africa to 5.8 percent for the Andean region to 7.6 percent for Asian developing countries.

The IMF said that particularly worth noticing is a rebound in much of Africa where prospects "appear more favorable than they have been for many years." In 2005, bucking the global trend, African economies are projected to grow faster than in 2004.

Rajan said that Latin American countries, which also are projected to expand quickly, must continue to pursue reforms to achieve sustained growth rather than periodical surges and that Middle East nations should use the windfall from high oil prices "wisely." The report said a priority in the latter region is putting in place the "institutional infrastructure to underpin non-oil private sector development."

In 2005, the global expansion is likely to remain solid but lose some momentum, the report said.

The IMF projected that the global economy will grow by 4.3 percent in 2005, slightly less than projected in April, with economies of all major regions and countries but Africa and India slowing down.

"The balance of risks has shifted to the downside with further oil price volatility a particular concern," it said.

The report said that increasing oil prices likely will continue to weaken expansion for several quarters.

Rajan said, however, that higher oil prices are likely to have a moderate impact on developed economies.

Crude oil prices exceeded $50 per barrel September 28 for the first time but closed at $49.90 per barrel at the New York Mercantile Exchange.

However, "we are in better situation today than we were 30 years ago" when oil crises triggered widespread recession, Rajan said, because central banks have gained greater credibility in fighting inflation and oil prices in real terms are well below those of the 1970s.

Rising oil prices should be a greater concern for developing countries in which inflation is not "well-anchored," he said. Central banks in those countries need to be vigilant, Rajan said.

"But there is no reason for alarm," he added.

The IMF said that other potential risks to future economic growth include the oil market's vulnerability to shocks, an abrupt correction of global current account imbalances and a sharp contraction of the Chinese economy.

In addition, the report discusses the global housing price boom; the European Economic and Monetary Union; and the urgent need for pension, health care and related reforms in developed countries.

The full report can be viewed at http://www.imf.org/external/pubs/ft/weo/2004/02/index.htm .

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)