The International Monetary Fund predicts a growth rate of about 4.3 per cent for the world economy despite oil price peaks, natural catastrophes and the general imbalance of the world economy in 2005.
With a growth rate of 3.5 per cent, the United States continued to be the fastest growing industrial country. Despite the 6 per cent deficit in the current account, the value of the dollar did not plummet; on the contrary, the exchange rate of the dollar to the euro strengthened by 14 per cent during the year. The economic prospects of the United States weakened towards the end of the year when inflation picked up and the US Federal Reserve raised the interest rate of the dollar gradually to over 4 per cent. The devastation caused by hurricane Katrina will persist for a long time, even though its immediate impact on the overall growth rate of the economy in the United States was not great.
Economic growth in Europe is still concentrated in the emerging markets of Central and Eastern Europe. With a growth rate of 4.3 per cent, these markets are catching up with the standard of living in the euro area. The biggest countries of the euro area are slow to dismantle rigid structures in their economies, and the growth rate in the area will be under 1.5 per cent in 2005. Finland’s economy grew by nearly 2 per cent, or slightly more than the average rate in the euro area. The fastest growing euro country was Ireland, with a growth rate of 5 per cent.
The economic growth of developing countries has been rapid after the crises of the late 1900s. In 2005 the annual growth rate was 6.4 per cent. As in recent years, the world’s fastest growing economies were China, India and Russia, with growth rates of around 7 per cent.
The basic structures of developing countries have strengthened; this is also reflected as improved international ratings. Owing to the favourable trend, the net amount of private capital flows to the developing markets reached a new peak, nearly USD 360 billion at the annual level. At the same time, the low interest rate and good liquidity of international financial markets have kept the price of financing low.
The imbalance in the world economy – Americans’ credit-driven consumption financed mainly by Asian central banks – showed no signs of improvement during the year. Spurred by new impending threats, the risk of a global recession increased towards the end of the year.
During 2005 it became clear that high oil prices have come to stay. Between 2002 and 2004, the annual mean price of oil rose from USD 29 to USD 38 a barrel. In 2005, the price already reached USD 55 a barrel. Although the price of oil is not as important for the world economy as it was in the 1970s and 1980s, the high price of energy is a threat to global economic growth.
The dispute between Russia and Ukraine over the price of natural gas also made Europeans aware of their dependence on Russia’s gas deliveries. Other conflicts posing a threat to the world economy are the continuing war in Iraq, the escalation of terrorism, the start of a nuclear programme in Iran and, as the most recent threat, the spread of avian flu. For the world economy, the year 2006 started with many uncertainties.