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2004 Marked By Strong Economic Growth Despite High Oil Prices

The world economy grew at an impressive pace in 2004, despite a sharp rise in oil prices.

It was on balance a very good year. Raghuram Rajan is the chief economist at the International Monetary Fund (IMF). He addressed reporters in October when he released the Fund's annual world economic outlook.

"Because of the tremendous growth in the early part of the year, we have raised the global growth forecast from the one we made in April to five percent for 2004," said Mr. Rajan. "This is the fastest in nearly 30 years. For 2005, however, we have lowered our forecast slightly to 4.3 percent, largely reflecting the effects of higher oil prices."

As in 2003, growth was fastest in China, where the economy expanded by over nine percent. Growth has been so fast in China over the past decade that this nominally communist country with a now largely market-based economy has lifted nearly 300 million people out of poverty.

There were worries at mid-year that the sharp increase in oil prices would push the world economy into recession. That didn't happen even though growth did slow in Europe with the 12 countries that use the euro currency growing by less than two percent. By contrast the economies of both the United States and Japan expanded by about four percent.

The world oil price averaged $41 per barrel in 2004. That was a 31 percent increase over the previous year.

Raghuram Rajan of the IMF says increased demand from China was the principal reason that oil prices rose so significantly.

"Between 30 to 50 percent of the increased demand this year is from China. And approximately eight to ten percent from India," he noted.

Oil analyst Philip Verleger says oil prices are likely to stay high. He believes that demand has so far outstripped supply, that the world oil market is very tight. Mr. Verleger says prices for forward contracts of oil show the market expects prices to remain very high.

"What you can see from the chart is that from 2000 to 2003 those forward crude prices were steady at about $25, $22 a barrel," he said. "They've recently increased by 50 percent as buyers and long-term investors began to realize that we had a collision with the failure to expand supply."

As 2005 begins the world textile and apparel trade will undergo its most far-reaching change in 40 years. The patchwork system of quotas that has regulated textile trade is being abolished. The small exporting developing countries that pushed so hard for this reform a decade ago are now having second thoughts. They fear that big producers like China and India will take over the textile and apparel market. Gary Hufbauer of the Institute for International Economics in Washington D.C. says that various safeguard measures being activated by the United States and Europe will prevent any immediate disruption. But Mr. Hufbauer has no doubt that big changes are on the way.

"There are a lot of legal actions being prepared as we speak to delay, we could say, the onslaught of competition from China and India as well," he said.

As with the oil price there is uncertainty as to just what will actually happen in the garment trade. Nonetheless most economists are generally optimistic about the coming year.