World Economic Outlook 2005

The International Monetary Fund (IMF) recently released its World Economic Outlook report for 2005, making a series of interesting statements regarding needed actions to mitigate the risk of financial crisis and promote a steady transition to the emerging realities of the global economy. Please find below some summary points I extracted so far from my reading of the IMF conclusions and the WEO report, which can be found in its entirety Here:

1. Although projected global growth is forecast to be 4.3 percent in 2005, volatile oil prices and higher interest rates cause the world economy to face some downside risk. Further, the global economic expansion continues to rely heavily on growth in the United States and emerging Asian economies, while the Euro area and Japan continue to struggle (growth forecast for US is 3.6% compared to 1.6% for Europe).

2. China needs to show greater exchange rate flexibility in light of the fact that investment in China continues to increase - It now accounts for a whopping 45 percent of GDP. By contrast, India needs more investment, especially in its infrastructure, which will require a realignment of government budget priorities and the strengthening of the Indian private sector.

3. The forecast growth of the world economy faces three significant risks: (a) higher interest rates, (b) high and volatile oil prices, and (c) increasing current account imbalances.

4. Two important medium-term transitions that are taking place in the world: (a) the increasing economic importance of developing countries; and (b) the aging of industrial country populations. The IMF believes that the international community has done "too little to adjust to these transitions."

5. Over the next 25 years, China should see car ownership multiply 15 times, and India only slightly behind. The spectacular growth of these countries, although beneficial to all, will strain existing resources. One example of such consequence are high and volatile oil prices.

6. The rich industrial countries are aging. The IMF explains that "not only should they be restructuring their own work environment to make better use of the changing labor force, but also many should be sending capital to younger, poorer developing countries."

7. Rich countries should be saving more and running larger current account surpluses, while poor countries should be investing more, and running larger current account deficits. Yet, today, what we see is that emerging markets are financing the rich. Therefore, the problem is that the current direction of capital flows does not match the realities of global demographic trends.

8. The United States needs to save more. The IMF believes that the administration's pledge to cut by half the fiscal deficit in five years must be backed by "credible measures to achieve it"...and that "monetary policy could help if higher interest rates slow price growth and lead to greater household savings."

9. Regarding oil, the IMF concludes that "Oil price volatility can be reduced by disseminating more timely and accurate information on production and inventories. Unnecessary impediments to oil investment, ranging from uncoordinated environmental standards across the various states of the United States to drastic restrictions on private or foreign participation in the oil sectors of some countries, need to be removed. Energy efficiency can also be improved by raising the price of oil and gas to their true economic cost. In particular, countries that have not passed through oil price increases to consumers, or who do not impose sufficient taxes, should start doing so."

10. The foreign currency reserve build-up by emerging Asian economies is now undermining both global monetary control and the soundness of their own financial systems. IMF expects "greater exchange rate flexibility would slow reserve build-up and allow countries to regain monetary control."