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2004 And Beyond: World Economy Expands But Risks To Growth Remain

President Bush has said his administration pursues a strong-dollar policy (file photo) Despite higher oil prices and a falling U.S. dollar, the world economy turned in a relatively good year in 2004 and is expected to have modest growth in 2005. That's a consensus view of economists. The growth was spurred by China and to a lesser extent the United States. But the expansion was not uniform, and the economy in much of the rest of the world -- from Europe to the Middle East to Africa -- was stagnant.

Prague, 15 December 2004 (RFE/RL) -- The global economy continues to grow at a healthy rate, although economists looking to 2005 said there are several risks that could derail expansion.

The Economist Intelligence Unit (EIU), in its year-ahead report issued in December, predicted the global economy will expand around 3 percent in 2005 after hitting 4 percent in 2004 -- its rate highest in years.

"We're cautiously, I would say, optimistic," said Gerard Walsh, the London-based EIU's economics director. "While there are very, very significant risks to the world economy, overall we're expecting the world economy to continue to grow -- only not as fast as the breakneck speed that was achieved this year."

China was clearly the star in 2004. The economy of the world's biggest country grew around 9 percent this year -- a staggering rate that if maintained would see its economy double in size every eight years. The EIU said it expects China will grow around 8 percent in 2005.
The Economist Intelligence Unit said the CIS is now the world's fastest-growing economic region, with regional growth in 2005 expected to top 6 percent.

But the risk is that China will "overheat" -- in other words, grow too quickly and trigger inflation. Chinese authorities, mindful of the dangers, have introduced measures to restrict bank lending and investment.

Walsh said those measures could work. But they could also go "too far" and be too restrictive, thus slowing economic expansion in the rest of the world.

"The policy instruments the Chinese government are using are really quite blunt," Walsh said. "It's difficult to know whether what they've done already is going to be enough to slow down growth -- or in fact have they done too much, given the fact the world economy is going to be slowing next year. That in itself will have a dampening impact on China's performance."

China's boom has been both good and bad for the global economy. It has stimulated growth in Asia and other parts of the world, but it has been underwritten by massive exports to the United States. China's trade surplus with the United States this year reached a staggering $124 billion.

The result is a record U.S. current-account deficit, which in turn has helped to erode international confidence in the U.S. dollar. The dollar this year hit all-time lows against other leading currencies, falling to around 1.35 against the European common currency, the euro.

Walsh said the dollar's decline is likely to continue in 2005: "The only thing that is going to be able to produce a significant correction in the [U.S.] current account deficit -- not just next year but over the next five years -- is a weaker dollar," Walsh said. "So we are actually expecting the dollar to average about 1.40 to the euro in 2005."

Economists said the dollar's drop is manageable and even beneficial if it helps the U.S. to lower its deficit. But the currency's fall carries significant risks, particularly if the dollar drops too quickly or too far. In that case, the U.S. central bank could raise interest rates to stabilize the currency. The higher rates in turn could bring growth in the U.S. economy -- and thus the global economy -- to a halt.

Oil prices present another significant risk.

The price of oil in October shot to a record $55 per barrel, as China's consumption grew and traders worried about the risk of a major terrorist attack in the oil-rich Middle East. The Paris-based Organization for Economic Cooperation and Development (OECD) said higher oil prices acted as a significant drag on the world economy, particularly in the second half of 2004.

By the end of the year, oil prices moderated to around $40-$45 a barrel as supply fears eased. But the OECD and others said the markets remain jittery and an unforeseen disruption could see prices rising quickly again.

Whatever happens to oil or the dollar, one area of the world will continue to grow very rapidly: the energy-rich Commonwealth of Independent States (CIS).

Willem Buiter, the chief economist of the European Bank for Reconstruction and Development, said higher oil prices have led to a boom. He said that boom has now spread beyond the key oil producers -- Russia, Kazakhstan, and Azerbaijan -- to the rest of the region.

"Oil and gas prices are dragging Russia itself and Azerbaijan, Kazakhstan and Turkmenistan merrily along with them -- and strong cotton prices [as well]," Buiter said. "Gold prices do the same for Kyrgyzstan, and for aluminum it's Tajikistan. So we have a range of very favorable international conditions. Not only are the prices [of their commodity exports] higher, but also for their non-commodity exports, there's buoyant demand."

The EIU said the CIS is now the world's fastest-growing economic region, with regional growth in 2005 expected to top 6 percent.
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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.