At an aggregate level, the growth prospects for industrial countries remain reasonably healthy, with the projected expansion of 2.5 per cent in both 2005 and 2006. Though lower than the last year’s 3.5 per cent, this rate is slightly better than the past five years’ average of 2.4 per cent. For Asia, international trade and financial conditions remain favourable. The volume of world trade is expected to grow robustly, though not as fast as last year.

Despite rising short-term United States dollar interest rates, the region continues to attract capital inflows and pays premiums that are well below historical norms on funds raised in international markets. The prices of benchmark Brent crude have already averaged $53/bbl in 2005 through 31 August.

Prices continue to ratchet up on news of possible disruptions to supply. Even before Hurricane Katrina, tightness in the oil market was expected to continue through 2006, and possibly beyond.

But events have moved quickly and recent rises suggest that even these estimates may be too low and that oil prices could be sustained at higher levels.

The yearly average price for 1979 was $83/bbl. Even if oil prices continue to climb, a replay of earlier crises is unlikely, primarily because the global economy is now considerably more oil efficient than before and is better able to cope with inflationary threats. But if oil prices continue to rise and upward pressure persist at considerably high levels, the outlook for growth of the international economy would be downgraded, with consequent knock-on effects for developing Asia.

The robust expansion in world trade continued into the first half of 2005, though with some pullback from the vigorous expansion of 2004. The downswing in the production cycle of high technology industries has negatively affected industrial production and world trade.

After the run-up in the past couple of years, prices of non energy commodities stabilized in the first half of 2005. This was a result of the moderating global demand and easier supply.

Prices of soft commodities continued to fall on favourable harvests and increased supply. Prices of metals and minerals, though marginally declining in recent months, are expected to remain robust on the back of firm growth in Asia.

Overall, non-energy commodity prices are expected to register a modest gain of about 2–3 per cent, before expanded supply and increased stocks peg back prices in 2006. Rising United States dollar interest rates could also impact adversely on commodity prices. Rising short-term American interest rates have barely registered in emerging financial markets.

Emerging markets, particularly Asian equity and bond markets are expected to continue to benefit from capital inflows in 2005. After a brief retreat in mid-March and April, capital flows resumed by midyear, with equity portfolio investment showing particular strength. With low long-term US interest rates, credit spreads have also begun to narrow again.

Emerging markets’ prospects for external financing conditions remain broadly favourable in 2005, given their robust economic growth and favourable macroeconomic conditions, but if long term dollar rates begin to climb, as seems likely, these markets are likely to face more difficult circumstances moving through 2006.

According to the latest economic update 2005, divergent growth, savings, and investment across the major regions of the world are unlikely to correct themselves quickly. There is general agreement that the resolution of these imbalances will require coordinated global actions, and that the resolution of imbalances would be aided by a fall in the real value of the US dollar

United States

Brisk growth continues on the back of strong private consumption and a booming housing market. In the first half of 2005, growth was 3.6 per cent, measured year on year. Underpinning the broad-based economic expansion, the trade balance, which was a major drag on growth in the second half of 2004, also improved. Exports surged by 13.2 per cent in the second quarter, at a seasonally adjusted annualized rate, building on a 7.5 per cent increase in the first.

Growth of import demand slumped, partly related to a large de-stocking of inventories. If business investment continues to pick up, helped by healthy corporate profits, imports will likely gain strength again, eliminating the net contribution of the external sector. Higher oil prices will also hoist the US import bill.

Strong consumer spending, reflecting high consumer confidence and buoyancy in the housing market, has been a major factor in the current expansion. But household finances are stretched and the household debt-service burden has soared to record highs. Although mortgage rates remain low, continued tightening by the Federal Reserve—in a context of a return to a neutral policy stance amid heightened inflation concerns—may now continue into 2006.

If oil prices do not jump further and the housing market cools gently, the overall outlook is mildly positive for the United States economy. The GDP growth projection is 3.6 per cent for 2005. A smaller fiscal stimulus, tighter monetary conditions, and a more sedate housing market are likely to mean that growth will edge closer toward its long-term trend rate of 3.3 per cent in 2006.

High oil prices could also help quell consumer spending. It is too early to estimate the likely impacts of Hurricane Katrina. While the devastation and loss of lives were extreme, earlier experiences with natural disasters suggest that long-lasting effects on the overall US growth are likely to be small, but oil supply disruptions could cause further spikes in prices and weaken confidence.Japan

Following a mild recession in 2004, the GDP grew by 1.3 per cent in the first half of the year. Domestic demand has firmed up on both household and corporate fronts. Household income has expanded gradually and the unemployment rate has fallen to its lowest level since August 1998. This has helped support private consumption, which rose by 1.3 per cent in the first half.

Business investment also rebounded, by 4.6 per cent on the same period of the previous year. Capital spending may grow further if activity in the electronics sector recovers and this should encourage further labour hiring. Despite firm growth in the PRC and the US, Japan’s major trading partners, continued export weakness has partly offset these positive developments.

However, renewed inventory building in the second part of the year in the PRC and the US may support a recovery in exports in the latter half of this year. Exports would also benefit from a pickup in the electronics cycle.

Given the better outlook for domestic demand and recovering exports, GDP is expected to grow at 1.6 per cent in 2005. However, long-term potential growth is limited by Japan’s aging population and linger-ing structural weaknesses. With its high level of energy efficiency, Japan may not be

as badly affected as other regional economies by high oil prices.

In the 15 years since Japan’s economic bubble burst Japan has been through a succession of economic problems. Now it appears things are beginning to look up.

On the back of private consumption underpinned by strong corporate gains, falling unemployment and steady wage increases, the economic outlook is promising.

The OECD, on the other hands, now expects Japan’s economy to grow 2.4 per cent in 2005 and two per cent in 2006, compared with its previous forecasts for 1.5 per cent growth this year and 1.7 per cent next year.

It also expects unemployment rates to keep falling, after having already fallen 2005. By the end of 2006, the OECD predicts that unemployment would have fallen to four per cent, down from 5.1 per cent in 2003.