Article [ Article 2007100501 - 05/10/2007]

A Medium-Term Outlook for the World Economy: 2007-2013

In the euro area, real GDP is projected to rise at an average annual rate of 1.9% over the 2007-2013 period. Growth in the euro area should build on the components of domestic demand, with a small negative contribution to GDP growth stemming from net foreign trade. Moreover, economic growth is set to fall below the period average as of 2010, as growth in the labour supply declines due to the area's rapidly ageing population. Consumer price inflation - as measured by the change in the deflator of private consumption - should average 1.9% per annum, held in check by a vigilant monetary policy while effective demand surpasses potential output levels. The nominal short-term interest rate is projected to rise from a yearly average level of 4.1% in 2007 to 5.8% in 2013. The euro's nominal effective exchange rate should appreciate on average by 2.5% per annum over 2007-2013 due to a combination of higher average inflation in the rest of the world and higher interest rates in the euro area than in other parts of the world economy. Substantial progress is expected with respect to fiscal consolidation over the projection horizon; indeed the area's fiscal position is projected to return to balance in 2010 and remain in surplus thereafter.

Real GDP in the United States is expected to rise at an average annual rate of 2.8% over the projection period. However, growth will most likely be somewhat erratic from year to year as, under current US laws and policies, a number of significant tax cut provisions should expire and reduce domestic demand growth. As tax cuts expire over the projection period, the us fiscal deficit is projected to decline to just 0.3% of GDP in 2013. The US current account deficit is projected to recede from 5.7% of GDP in 2007 to 4.6% of GDP in 2013.

Real GDP in Japan is expected to progress at an average annual rate of 1.3% over 2007-2013. Consumer price inflation should turn positive on a year-on-year basis in 2009 and reach 1.9% in 2013. Japan's growth momentum should fall off noticeably by the end of the projection horizon as the ageing of the country's population leads to an ever stronger decline in the labour supply. Japan's overall budget deficit is expected to fall from 3.8% of GDP in 2007 to 3% in 2009; the fiscal shortfall should then increase once again to 4.5% in 2013 due to rising public sector wages, transfers to households and debt interest payments.

Gross output in the rest of the world should expand at an average annual rate of 6.7% over the 2007-2013 period, while inflation should average 4.9% per year over the same period. Growth is thus projected to continue at a rapid pace, surpassing the 6.2% average annual increase for the 2000-2006 period.

A stochastic evaluation of the risks surrounding the projection's main results indicates that, throughout the projection period, there is only a very low probability that GDP growth in the euro area will exceed 2.9%, or that it will fall below 0.5%. In comparison, GDP growth in the United States is unlikely to exceed 4.7% or fall below 1.1%. (The difference in length of the two confidence intervals stems from the different parameter estimates for each region, while the asymmetry of the confidence intervals is a result of the stochastic simulation, which does not necessarily lead to a symmetric distribution of the simulated values around the mean.) In our view, the current major medium-term downside uncertainty - in light of its potential to curtail worldwide economic growth - can be seen in a continued sharp increase in world energy prices. A possible upside risk is currently seen in a possible underestimation of trend productivity growth, especially in the European Union and Japan.