Chicago Tribune: World economic growth is seen slowing in 2005

World economic growth is seen slowing in 2005
Asia is predicted to be top region
By Viorel Urma
Associated Press
Published December 27, 2004

Buffeted by the soaring cost of oil, the world economy is expected to moderate in 2005, led by a slowing of the expansion in industrialized countries.

Spurred by China and India, developing countries should enjoy solid growth. Predictions are that Asia will lead the global economic race--though Japan is facing a slowdown--and that the United States will still outrun Europe.

The World Bank sees global economic expansion slowing in 2005 to 3.2 percent from an estimated 4 percent in 2004 because of high and volatile oil prices, a decline in investment growth due to higher interest rates, and concerns about the growing U.S. trade deficit.

"The global economy is slowing, but it will likely keep expanding on the basis of a recovery in the U.S. and Chinese economies," Bank of Japan Gov. Toshihiko Fukui said.

The Organization for Economic Cooperation and Development said in November that oil prices have already taken their toll on the major economies, prompting it to cut its growth forecasts for 2005.

Across the OECD's membership of 30 industrialized countries, it expects growth of 2.9 percent next year, down from the 3.4 percent it forecast in May.

For the 12-nation euro zone, the Paris-based global economic think tank expects the United States to lead the global recovery but cut its growth forecast for 2005 to 3.3 percent from 3.7 percent. For Japan, it now forecasts growth of 2.1 percent, down from the 2.8 percent previously forecast.

Here's a region-by-region look at predictions for the global economy in 2005:

Asia

China's economic boom is expected to continue to power fast expansion throughout the region, despite efforts by Beijing to slow 9 percent growth to a more sustainable level by cutting public spending and bank lending, and raising key interest rates.

Strong exports and domestic demand in the country of 1.3 billion are boosting trade throughout the region, a trend likely to continue as long as U.S. and European consumers continue to snap up made-in-China products.

Helped by India, East Asia is expected to remain the world's fastest growing region, with 7.1 percent growth in 2005, the World Bank projects.

By contrast, Japan's economy appears headed for another slowdown, government data indicate. After more than a decade of stagnation, the world's second largest economy has been witnessing a modest rebound, marking six straight quarters of expansion. But fears have been growing that a decline in exports will push down growth, while a rebound in consumer spending will not be enough to keep the recovery going.

United States

The U.S. economy is expected to grow about 4 percent in 2004, and economists forecast growth at or above the economy's trend rate of about 3.5 percent in 2005.

"This year it is on track to complete the third year of recovery with a strong 4 percent growth," Treasury Undersecretary John Taylor told business executives during a recent trip to India.

November's weaker employment report was a disappointment, but employment growth has averaged 185,000 monthly since the start of the year, fast enough to take in labor market slack.

While the oil price has boosted day-to-day inflation, core inflation pressures have remained under control.

Robert DiClemente, head of U.S. economic analysis at Citigroup, expressed concern about the strength of the global economic expansion and said the huge current account deficit in the United States, a key factor in the plunge of the dollar, will narrow as the Bush administration pushes policies to cut its budget gap and encourage private savings.

The OECD's chief economist, Jean-Philippe Cotis, warned that the burgeoning U.S. current account deficit--5.7 percent of the gross domestic product--was a major source of disturbance in the world economy and called on the Federal Reserve to raise interest rates gradually, encouraging greater savings to rein in the gap.

According to OECD, the U.S. current account deficit--the broadest measure of foreign trade--is estimated to widen from 5.7 percent of GDP in 2004 to 6.2 percent in 2005 and 6.4 percent in 2006, or about $825 billion.

Europe

After a relatively strong first six months in 2004, growth in the 12-country euro zone has slowed sharply. GDP rose by just 0.3 percent in the third quarter, as exports suffered from a strong euro and household spending remained flat.

The European Central Bank cut its projection for economic growth in 2005 to between 1.4 percent and 2.4 percent.

Central Bank President Jean-Claude Trichet said Europe's modest recovery remains on track but will slow next year due to high oil prices.

South America

Brazil, which has South America's largest economy, is poised for a second straight year of growth in 2005 and hopes to build on its strong exports while benefiting from rising consumer demand among its 182 million citizens. Economists predict Brazil's economy will grow 3.5 percent in 2005 following estimated growth of 4.7 percent in 2004.

Argentina's economy is expected to expand 5.4 percent following estimated growth of 8 percent in 2004. But South America's second-largest economy faces a big challenge: the country's debt default. In 2002, it was the largest ever by a sovereign country, with payments stopped on some $100 billion in public debt.

Creditors have resisted offers by President Nestor Kirchner to pay as little as 30 cents on every dollar. The negotiations are being closely watched on Wall Street and in Europe. Argentine officials say they hope to resolve the issue in 2005 with a formal debt exchange.

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