World Growth – Can It Continue?

Here is a nice piece about the fast pace of world growth, and whether or not it can continue.

MOST people cannot remember when the world economy last grew so rapidly. The International Monetary Fund now reckons that real global GDP is likely to increase by 5% this year, its strongest pace for a generation. That growth has been led largely by the twin engines of robust consumer spending in America and booming corporate investment in China, but Japan's recovery has also been stronger than expected this year and even the euro area has perked up. Emerging economies as a group are enjoying their fastest growth for at least 25 years. It would hardly be surprising, therefore, if the world economy slowed next year. But will it slow gently or crash into a wall?

The IMF expects global growth to run at a still healthy 4.3% in 2005. Other official organisations, such as the OECD, the Federal Reserve and the European Central Bank, are also optimistic about the health of the global economy over the coming year. We hope that they are right. But history suggests that when things look so rosy, one should always ask "what might go wrong?". There are four main risks: higher oil prices, a slump in America's consumer spending, a global house-price bust, and a hard landing in China.

The thing that worries me most – a slump in consumer spending. Americans can only take on so much more debt. But, like most economic issues, if the response is appropriate the pain for us all is minimized. Given that neither candidate for President right now has shown any great understanding or skill in the economic arena, maybe we should be worried.