Growth Realignment Maintains Global Expansion

I. GLOBAL ASSESSMENT AND OUTLOOK The current worldwide economic expansion is forecast to be the best above-trend period of the global business cycle. Robust growth in the last four years and a brisk outlook for 2007-08 will result in a worldwide expansion lasting from 2003 to 2008, which matches the duration of the 1984-89 global upswing when the world's real output grew for six consecutive years above its long-term trend of 3.6 percent, averaging an annual rate of 4.3 percent. More important, the current expansion will exceed the 1984-89 benchmark as worldwide output during the recent expansion of 2003-08 is estimated not only to grow above trend but also to average 4.8 percent in the whole period. In particular, world output is estimated to have increased by 5.2 percent in 2006; the baseline forecast calls for growth to moderate to 4.7 percent in 2007 and slightly accelerate to 4.9 percent in 2008, thus finishing with the strongest global expansion on record. Despite inflationary concerns, tight monetary conditions, and high energy prices, the global economy strongly enters the seventh year of the current expansion with a realignment of leadership in growth among the industrial countries. Economic growth should remain buoyant in China, India, Russia, and other Asian emerging economies. However, in the United States growth in economic activity will slow down below trend in 2007 and bounce back above trend in 2008. The Euro Area and Japan will grow slightly above trend over the next two years. Growth realignment between the United States, Europe, and Japan, coupled with the continuation of rapid growth in the Asian emerging economies, will maintain overall growth in the world economy above trend over the forecast horizon. However, as the United States accounts for 16 percent of total growth in the world economy, the expected slowdown in economic activity will have an adverse impact to worldwide growth in 2007, especially in the first half of the year, trimming global growth by 0.5 percent for the whole year. On the inflation front, growth in worldwide consumer prices is estimated to register 3.1 percent in 2006, the same as in 2005. Worldwide anti-inflation monetary polices and the economic slowdown in the United States ended the acceleration in inflation rates despite higher oil prices. Over the forecast horizon, 2007-08, the worldwide inflation rate will slightly decelerate to 2.8 percent. The volume of world trade in goods and services is forecast to go along with the projected global demand patterns over the forecast horizon. Following acceleration to an estimated growth rate of 8.9 percent in 2006 from 7.4 percent in 2005, growth in the volume of world trade is forecast to slowdown to 7.6 percent in 2007 and bounce back to 8.3 percent in 2008. II. SHORT-TERM INDICATORS AND FORECASTS The baseline forecast incorporates the major findings of the World Economic Survey conducted by the Ifo Institute for Economic Research at the University of Munich and the International Chamber of Commerce (ICC) in the fourth quarter of 2006. About 1,000 executives from 89 countries have indicated that although the world's economic climate deteriorated slightly in the fourth quarter for a second time in a row, it remained at levels above its long-term trend. The recent overall reading of the worldwide survey is consistent with a growing global economy at a slower pace than in the first half of 2006. The major findings of the fourthquarter survey are as follows: * Worldwide, executives evaluated the current situation, the fourth quarter of 2006, favorably with overall economic conditions above satisfactory levels. They found economic activity in their countries to be better than in the fourth quarter of 2005. Regarding the future, executives expect economic conditions in the next two quarters to be better than current economic conditions prevailing in the fourth quarter of 2006; however, growth will not be as high as in the first three quarters of 2006. …