D. Forecast for Next 12-18 months Essay Example for Free

D. Forecast for Next 12-18 months Essay The world economic outlook is bright. World GDP growth is forecast to average slightly more than 4 percent per annum during 2006-2007. Asia will continue to act as the primary engine of global growth, though activity will also be supported by continued U. S. economic expansion of almost 3 percent annually. China will continue to register robust growth of slightly more than 9 percent per annum, and output will continue to increase rapidly also in India. Japan also appears to be entering a longer phase of stable growth. The positive global environment will be reinforced by the Euro Area, where economic growth is forecast to accelerate in response to a recovery in domestic demand (The Research Institute of the Finnish Economy). The National Institute of Economic and Social Research has recently released a set of forecasts regarding the state of world economy in 2007. Below are listed some of the key points: Global growth will quicken to 5. 1 per cent this year falling back only a bit in 2007 to a still rapid 4. 7 per cent. Inflationary pressures are rising, mainly owing to higher oil prices, but the impact of rising oil prices on inflation and output is now more muted than in the past. Global imbalances remain marked and the dollar may have to fall by a further 30 per cent in order to halve the US current-account deficit. The US economy will grow by over 3 per cent a year in both 2006 and 2007, but inflationary pressures are mounting. The Japanese economic recovery has become self-sustaining and GDP will rise by 3. 1 per cent in 2006 and by 2. 6 per cent in 2007. The Euro Area will expand by around 2 per cent a year in both 2006 and 2007, and consumer price inflation will average about 2. 5 per cent in both years. The NIESR report goes on to elaborate upon the aforementioned points: Advanced countries in the OECD bloc are participating in the upswing but the main reason for the current period of exceptionally strong global growth is the long boom in China. In 2005, China represented 15. 4 per cent of global GDP on a purchasing-power parity basis, up from 3. 4 per cent in 1980. Global inflation is rising in response to higher oil prices, but much less so than in the past. New estimates suggest that a $10 permanent rise in oil prices will add 0. 2 to 0. 4 percentage points to inflation in the United States in the four years to 2009, with a somewhat smaller impact in the Euro Area, and a still smaller effect in the UK. The global upswing continues to be accompanied by major imbalances, notably the scale of the US current account deficit, which widened by 4. 5 percentage points of GDP between 1997 and 2005. Since this deterioration has mainly financed increased consumer spending rather than productive investment, financial markets may conclude that the deficit is not sustainable. It is estimated that the dollar’s value against a basket of currencies needs to fall by a further 30 per cent in order to reduce the current account deficit by 3 percentage points of GDP. The US economy will grow by 3. 6 per cent in 2006 and by 3. 1 per cent in 2007. The economy continues to be driven mainly by consumption, which will increase by 3. 3 per cent in 2006 and by 2. 9 per cent in 2007. Housing investment is slackening but business investment, stimulated by high corporate profits, will buoy growth this year and next. Inflation is picking up and the private consumption deflator will rise by 3. 0 per cent in 2006 and by 3. 3 per cent in 2007. There now appears little doubt that the Japanese recovery from the bleak period of deflation and stagnation has become self-sustaining. The economy grew by 3. 5 per cent in the year to the first quarter of 2006 . Business investment is expanding strongly and consumer spending is expected to grow by 1. 9 per cent a year in 2006 and 2007. Average earnings, which had been falling earlier in the decade, will grow by 0. 8 per cent in 2006 and by 2. 8 per cent in 2007. The outlook for the Euro Area is for higher inflation despite a fairly modest recovery. Consumer prices will rise by 2. 6 per cent in 2006 compared with 2. 2 per cent in 2005. Tighter monetary conditions together with measures in Germany to cut the budget deficit will hold back growth in consumption and GDP in the Euro Area. Consumer spending will also be restrained by sluggish growth in average earnings as the corporate sector manages to retain its increased profitability (Barrell et al, 8-31).