The main contributors to the global economy are the USA, Europe, Japan and China. Growth in Europe and Japan remains weak, even if Japan shows some signs of improvement in the last quarters. In each of the two blocks, Europe and Japan, we do not see growth rates of 2.0% or above this year, 2006 or even 2007, which is below the potential.
On the contrary, the other two blocks, the USA and China, seem to continue on their growth path. But here a slowdown is on its way. In China the government already introduced measures last year, which aimed at slowing down the economy. These measures were for example the rationing of credit for certain industries and a slight increase of short term interest rates. These measures seem to work lately and even if the official GDP numbers do not show that yet, the slower import growth suggests a slower GDP growth rate of still 9.0% down from 10.0%. The Chinese growth rate is likely to slow further to around 8.0% as industry profit margins get squeezed by higher commodity prizes and some industries suffer from overinvestment. However, we do not expect the GDP growth rate to fall below 7.0% in the near future, as private consumption is picking up.
The USA has enjoyed an exceptionally mild recession in 2001 and steady growth ever since mainly due to low interest rates and the not unrelated housing boom with lower mortgage rates and equity withdrawals. House prices will not go up much further and the remaining price increases will be smaller than in the previous years as the price level has already reached unusual highs. Short term interest rates went up significantly over the past 12 month, which increases the financing cost of adjustable rate mortgages (ARM). Long term interest rates stayed low or went even lower in the past months, but not significantly compared to last year. Therefore private consumption can not be fuelled by cheap refinancing and equity withdrawals in the future as it has been in the past. This does not mean that private consumption will be flat or decrease, it just means that it will grow slower as the additional stimulus from the housing sector will fade out.
As exports and investments profit from the relatively low US$ and still low interest rates we expect these parts of GDP to have a larger impact on growth than before, but they can probably not make up for the reduced growth in private consumption. Therefore we estimate the GDP growth for the USA to be between 3.0% and 3.5% for 2006 and 2007.
For the rest of the world we expect slightly higher growth rates in 2006 than in 2005 as the financing conditions remain very good. Investors are satisfied with very low risk premiums these days and keep investing in emerging markets bonds. With a time lag these easy financing conditions tend to lead to higher growth rates in emerging economies. Additionally the oil exporting countries enjoy high export revenues, which spill over into higher profits, higher investment and higher consumption.
The above put together we expect world GDP to grow at about the same rate in 2006 as in 2005, which should be roughly 4.0%.