The global economy

The world economy grew strongly in 2005 while inflation remained subdued. This outcome exceeded the optimistic forecasts of early 2005 despite headwinds from changes in the macroeconomic environment. First, inflationary pressures remained muted even as commodity prices rose further in the third consecutive year of buoyant world growth. Second, the US economy retained considerable strength despite the energy price hike and hurricane-related disruptions. Third, global financing conditions continued to be very supportive of growth, notwithstanding the progressive removal of monetary accommodation in the United States and, albeit less advanced, in the euro area. Finally, financial markets stayed calm despite the further massive and unexpected deterioration of the US current account balance during 2005.

The consensus forecast for 2006 is for a continuation of strong growth and low inflation worldwide. Strengthening business confidence and low or declining unemployment support this optimism about the near-term outlook for growth. However, several features of the current global upswing are less positive: fiscal deficits are large; household savings seem unsustainably low in a number of advanced economies; investment levels remain low; and global current account imbalances have reached unprecedented levels. At the same time, the inflation outlook has become more uncertain, as oil prices have risen to new record highs and output gaps are narrowing or even closing in many economies. One key question in this regard is whether the global disinflationary forces that have resulted from the international integration of major emerging economies will persist.