Research Group Projects Global Economic Boom in 2004, 2005
(Views high oil prices, constrained monetary and fiscal polices as threats)

1 April 2004

Source: Office of International Information Programs, U.S. Department of State.

The global economy is projected to experience in 2004 and 2005 a boom encompassing virtually all regions, with the U.S. and Chinese economies providing the strongest boost, an economic research organization says.

Rises in real global gross domestic product (GDP) of 4.75 percent projected for 2004 and 4 percent for 2005, if true, would be the strongest two-year economic growth rates since the early 1980s, Michael Mussa of the Institute for International Economics (IIE) said.

Mussa presented the group's global growth forecast at an April 1 news briefing.

The U.S. economy is projected to grow 4.5 percent in 2004 and 3.5 percent in 2005 and the Chinese economy 8.5 percent in 2004 and 7 percent in 2005, according to IIE.

Mussa cautioned, however, that high oil prices and the threat of even higher prices pose some near-term risk to IIE's optimistic forecast.

He also warned that sustaining rapid growth over the medium term will be challenging because of the already-low level of world interest rates, increasingly strong pressure on public finances from rapidly aging populations in most industrial countries and the huge U.S. current account deficit.

As the result of these factors, said Fred Bergsten, IIE director, policymakers have "little ammunition" -- fiscal or monetary -- to mount an appropriate response if the economic expansion slows down.

In a news release issued the same day, IIE said that the United States needs to boost employment and bring its current account deficit down -- the latter preferably by reversing much of the tax cuts of 2001-2003.

Bush administration officials have said repeatedly that the tax cuts have stimulated the U.S. economy coming out of the 2001 recession and contributed to a rebound in the following years. Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow have downplayed concerns about the size of the U.S. current account deficit arguing that as long as the U.S. economy continues to attract foreign investment and the U.S. government refrains from protectionism the deficit and related current account surpluses in other countries are likely to adjust without excessive shocks.

As for China, IIE said the country must cool down its overheating economy and correct its undervalued exchange rate.

"Both for its own sake and to contribute appropriately to necessary global economic adjustments, China needs to appreciate the value of its currency (by 15 to 25 percent) and then allow greater exchange rate flexibility," IIE said.

The institute said that other emerging economies, particularly India and Argentina, also are expected to register strong growth in the forecast period. Economies of the Middle East are projected to expand in 2004 by 4.25 percent and those in Africa by 4.5 percent, helped by high oil and other commodity prices, and then at only a slightly slower pace the following year.

The Japanese economy, which has suffered from stagnation for several years, is projected to expand faster than forecast in previous reports, IIE said. The institute projects a growth rate for Japan in excess of 3 percent in 2004 and around 3 percent in the following year. Mussa called the development "one of the biggest positive surprises of the last few years."

IIE said it has good news even for Europe -- a 1.75 percent expansion rate for the euro area in 2004 and 2.25 percent in 2005 -- where growth has been sluggish in recent years.

That is not much, Mussa said, but still a substantial improvement over the past two years.

Read the text of the news release by Institute for International Economics here.

[Note: More detailed region-specific projections can be viewed at http://www.iie.com/publications/papers/mussa0404.htm]