The world economy looks set for another year of robust growth. There are plenty of reasons to be optimistic that the impressive performance of the past few years, since the world emerged from the mess of the dotcom bust, will continue uninterrupted. Having grown by an average of more than three per cent a year so far this decade the noughties look set to be the world economyâ€™s best decade on record, eclipsing even the golden years of the 1950s and 1960s.
There are risks of course. Doomsayers continue to warn of a slump in the dollar, a renewed surge in the oil price or a collapse in the US housing market. They are right that the risks exist, but the world economy has proved its resilience admirably in recent years.
Who would have thought, for example, that the tripling of oil prices in the past three years would fail to tip the world into a recession combined with soaring inflation? In those three years the world economy has grown by almost five per cent annually â€” the fastest for more than 30 years. World stock markets are booming as investors show their confidence.
The main reason for optimism is that growth has broadened out from relying on the good old American consumer who, boosted by the ultra-cheap money and rising house prices of recent years, kept the world economy motoring while regions such as the eurozone and Japan were sluggish. Now both of those regions, along with China and India and other emerging economies, are performing well. They should be able to withstand the slight slowdown that many analysts are expecting in the US. In short, the world is rebalancing. The US economy, still by far the largest in the world, looks certain to slow this year.
Exports are healthy, thanks to a strong world economy and a weaker dollar; business investment and non-residential construction are also doing well. The Organisation for Economic Cooperation and Development expects US growth to slow to 2.4 per cent this year, from 3.3 per cent in 2006. It does not predict a US recession, nor does the IMF, which is forecasting growth of close to 3 per cent for the US this year. If the housing market recovers, the US economy could even return to robust growth in 2007.
The eurozone, long the sick man of the world economy, turned in a surprisingly respectable performance in 2006, growing by around 2.6 per cent, well above 2005â€™s rate of 1.4 per cent. The OECD and IMF expect growth to be closer to 2 per cent this year and next. That growth rate may sound paltry, but is decent by recent standards.
Germany has been the particular star in Europe, as its companies have responded to the strong world economy by raising exports, although questions remain about the strength of domestic demand.
Spain and Italy look a little less secure, with the former experiencing a property market bubble which looks vulnerable to a burst while the latter is suffering from a lack of competitiveness and high inflation. There are also some question marks over the strength of the French economy.
Few such doubts exist over China. Its economy is likely to grow by 10 per cent again this year, as it has done for many years, taking it to number four in the world economy ranking. It is now big enough to make its growth matter for the whole world. Taken together, emerging markets including India, Russia and Brazil now account for 70 per cent of world growth. They accounted for 50 per cent a decade ago. The world is much less dependent on the US now.
Japan, still the worldâ€™s second largest economy, seems to be recovering steadily from its decade-long slump although there are still concerns about whether its deflation problem has been solved in spite of rock-bottom interest rates of just 0.25 per cent.
Which brings us to Britain, the worldâ€™s fifth largest economy. Here, too, things look solid. Growth was better than expected last year, at around 2.6 per cent, and the economy looks to have powered into the new year in rude health.
The year here is likely to be dominated by the rise and rise of house prices, particularly in London and the south-east. At some point the great noughties housing boom will have to end. Another interest rate rise or two might just be enough to do that, given how indebted the average Briton has become. That could turn out to be the nasty surprise of this year. All in all, it is a pretty rosy scenario for the world and one which will allow company profits to keep increasing. The main cloud on the horizon is not the US current account deficit or a potential run on the dollar (it is likely to continue to slide, but not crash) but rather the emerging crisis surrounding Iran.
If the countryâ€™s bellicose leadership continues to defy the UN with its nuclear programme and responds to sanctions by carrying out its threat to shut the Straits of Hormuz and prevent a fifth of the worldâ€™s oil getting to market, the price of crude could shoot through $100 a barrel and rattle the confidence of world markets. â€”The Guardian