The global economy

The strength of the global economy surprised again in 2006. US consumption was unexpectedly resilient given the substantially weaker housing market, while there was a broad-based upswing in other advanced industrial countries alongside continued rapid growth in emerging market economies. Inflation remained subdued, with headline inflation receding in the second half of the year. However, underlying inflation pressures persisted, reflecting high, or rising, rates of resource utilisation in major economies.

The consensus view for the current year is for a continuation of the broad-based economic expansion - although at a slightly slower pace than in 2006 - easing inflation pressures and gradually receding current account imbalances. This scenario is supported by growing evidence of a classical recovery in the euro area and Japan, with export growth leading to rising investment, and in turn to rising employment and consumption. Healthy domestic demand in major emerging economies is also encouraging.

The baseline scenario remains subject to significant near-term risks, however. The impact of the downturn in the US housing market might not yet have been fully felt. Admittedly, Europe and Asia appear less dependent on US growth than a few years ago. Even so, there are questions regarding the strength of consumption in these regions and advanced industrial countries in general. At the same time, it remains to be seen whether inflationary pressures have been contained. Underlying inflationary pressures are still visible in major economies, and it is not clear whether the projected moderation of growth will be sufficient to significantly reduce resource pressures. Financing conditions, which have remained supportive to growth, might also eventually tighten, especially if inflationary risks were perceived to increase.