The international economy.

• Author: Hauskrecht, Andreas

World economic growth for 2006 is projected at 5.1 percent (measured in terms of real GDP), compared to growth rates of 5.3 percent in 2004 and 4.9 percent in 2005. The International Monetary Fund in Washington forecasts world economic growth for 2007 at 4.9 percent; so global expansion is to continue for the fourth consecutive year at a level significantly above the historical trend of 3 percent. (1)

While in the past economic output growth was strongly dependent on the performance of the U.S. economy, the forecast for 2007 predicts robust economic growth all around the world (see Table 1).

Europe

The long awaited European recovery finally materialized in 2006. Corporate restructuring improved competitiveness and increased consumption and investment spending (particularly in France and Germany), contributing to the turnaround. Consumer confidence is robust. Real output growth is forecasted at 2 percent for 2007, compared to 2.4 percent in 2006.

A big question mark lingers over the effects of the 3 percent increase in Germany's value-added tax in 2007 that might dampen consumer demand. As a net oil importer, the outlook depends significantly on future crude oil prices. Similar to U.S. house prices, housing prices in Spain, France, and Ireland are still elevated and a rapid downturn could cool off the economy.

Two long-term trends are alarming: first, productivity growth in most European countries has declined in recent years and jeopardizes future competitiveness in a global market. Second, economic fundamentals among member countries of the Euro area are drifting apart. While countries like Germany and France effectively managed an economic restructuring toward higher value-added production, other countries like Italy or Spain have been less successful. While per unit labor costs decreased in Germany and stayed more or less flat in France since the introduction of the euro, they have increased significantly in Italy and Spain. Over the long run, this might undermine the commitment to the Euro currency because depreciation might be too tempting for populist politicians.

The United Kingdom will do slightly better than continental Europe with an expected economic expansion of 2.7 percent. Job creation, consumption, and investment spending are robust and the economy expands around its potential output growth.

Far East

Japan's economy is slowly recovering from deflation and is expected to grow a hearty 2.7 percent in 2006 and around 2.1 percent...