The global economy

The world economy grew strongly in 2004, supported by expansionary monetary policies and unusually accommodative financial conditions. Sharply rising commodity prices failed to spark generalised inflation, but helped to moderate the global expansion in the latter part of the year. After a synchronised upswing in the first half of 2004, growth differentials widened again as commodity importers experienced a slowdown - with the notable exception of the United States and China - while activity in commodity-exporting countries generally continued to grow apace.

The consensus view for 2005 is for further robust global growth and generally subdued inflation. Yet recent developments in commodity and financial markets serve as reminders of key risks to this scenario. Oil prices may well remain high for some time. Further rises may hurt the global economy more than is currently expected. A return of unusually low long-term interest rates to more normal levels could curtail spending by households. Moreover, there has been little progress in tackling internal and external imbalances. Household debt has continued to rise and savings have declined in many advanced industrial countries while fiscal deficits have remained high. The reduction of current account imbalances, which have widened further since the beginning of the year, remains a major global challenge.