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Experts expect global economy to pick up speed

The global economy, which has coped amazingly well with fallout from natural disasters and lofty energy prices, is expected to pick up a little more speed in 2006 and log another year of brisk growth.
/ Source: The Associated Press

The global economy, which has coped amazingly well with fallout from natural disasters and lofty energy prices, is expected to pick up a little more speed in 2006 and log another year of brisk growth.

Still, risks remain — notably regarding the future direction of already surging oil prices, the International Monetary Fund indicated in its latest World Economic Outlook, released Wednesday.

The world economy expanded by 4.8 percent last year and is projected to grow by 4.9 percent this year. Last year's performance actually turned out better than the IMF had predicted, and the IMF's forecast for 2006 was upgraded.

In the IMF's previous forecast, released in September, the institution estimated that global economic growth would clock in at a respectable 4.3 percent in 2005 and 2006.

For the United States — the world's largest economy — the IMF is predicting economic growth will increase by 3.4 percent this year and 3.3 percent next year. Those projections would mark a slight slowing from last year's 3.5 percent growth but would still be decent.

If the IMF's global forecast for this year turns out correct, it would mark the best performance since 2004, when world economic growth bounded ahead by 5.3 percent — the best showing in three decades.

"Notwithstanding higher oil prices and natural disasters, global growth has continued to exceed expectations," the IMF said. A devastating earthquake and tsunami hit Asian countries at the end of 2004. Hurricane Katrina wreaked havoc on Gulf Coast communities in the United States, catapulting oil and gas prices.

"Looking forward, the baseline forecast is for continued strong growth, although risks remain slanted to the downside," the IMF said.

One of the biggest risks is the possibility that energy prices will move even higher, causing consumers and companies to turn cautious and tighten their belts, a development that would slow overall economic activity.

In the United States, oil prices closed at a record high of $71.35 a barrel on Tuesday.

Thus far, the impact of elevated oil prices on the global economy "has been more moderate than generally expected," in part because investors and businesses feel confident that central banks will make sure inflation doesn't get out of control, the IMF indicated.

But looking ahead there are reasons for concern because spare oil production capacity is still very low — making the market vulnerable to shocks, the IMF said.

"Indeed, with the recent increase in geopolitical uncertainties in the Middle East, options market data suggest risks are slanted to the upside, with a 15 percent probability of oil prices spiking above $80 a barrel by mid 2006," the IMF report said.

Against this backdrop, there's a threat that any further jump in oil prices might push up the prices of other goods and services, fanning inflation.

At this point, though, the economic outlook for next year is still good. The IMF is forecasting the global economy to grow by 4.7 percent in 2007.

Many economists believe that a slowing housing market will be a main factor in the expected moderation of economic growth in the United States this year.

The housing market — which has posted record-high home sales for five years in a row — has been an important contributor to the U.S. economy's good economic health. Hefty gains in home values also have made some Americans feel more wealthy and thus inclined to spend, which has supported overall economic activity in the United States.

Elsewhere in the World Economic Outlook, the IMF said China, which saw its economy grow by a blistering 9.9 percent in 2005, will probably see another hot year, with growth steaming ahead 9.5 percent this year. Next year, China's economy should expand by 9 percent.

China's rapidly growing economy, its growing appetite for oil and its trade practices have heightened tensions in the United States.

With the U.S. trade deficit with China hitting a record $202 billion (euro164 billion) last year, the Bush administration is pressing Beijing to take steps — notably revamping its currency regime — to narrow the gap. Chinese President Hu Jintao meets President George W. Bush on Thursday.

In other areas, the IMF projected growth in the euro zone to do better this year — climbing by 2 percent, up from 1.3 percent growth in 2005. Next year, economic activity should clock in at 1.9 percent.

Japan's economy, which grew by 2.7 percent in 2005, should expand by 2.8 percent this year. Growth, however, will moderate to 2.1 percent next year.