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IMF Optimistic on World Economic Growth - 2004-09-29

The International Monetary Fund says the world economy is growing at the fastest past in three decades, but in its semi-annual report the international lender says growth is likely to slow in 2005. The IMF is generally optimistic about world growth but views rising oil prices as the main risk.

IMF chief economist Raghuram Rajan says despite rising oil prices, the global economy is doing better than had been predicted six months ago.

"Because of the tremendous growth in the early part of the year we have raised our growth forecast from the one we made in April to five percent for 2004," he said. "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."

The semi-annual IMF report shows steady growth in all principal regions of the world, North America, Europe, Asia, Latin America and Africa. Growth is fastest in China (nine percent) and India (six percent), and for the first time in years, Japan is growing rapidly (4.4 percent). The United States is growing at a 4.3 percent pace and sub-Saharan Africa 4.6 percent. Europe is a relative laggard with the countries that use the euro currency growing by little more than two percent.

Mr. Rajan identifies the 50 percent rise in oil prices this year as the main risk to continuing growth. He says much of the increase in prices is due to increasing demand for oil in China and India.

"The phenomenal growth of China could have run a few more years without weighing on global energy resources," he said. "But because it accompanies the global recovery, the loss of oil production in certain quarters, and the targeting of oil supplies by terrorists, oil prices have risen sharply. While it would be alarmist to call this the first resource crisis of the 21st century, it is certainly a wake-up call."

With the world economy as yet largely unaffected by oil prices of $40 or more per barrel, Mr. Rajan declines to say what price oil would have to reach before it dramatically slows growth or triggers a recession. He says the major economies are today better prepared to cope with energy price shocks than they were in the 1970s. They have, he says, reduced their relative dependence on energy and central banks have demonstrated that they can contain the inflation pressure that typically accompanies an oil price shock.