The NIME Outlook for the World Economy 2006-2012 [ NEO 02-06 - 05/09/2006]

After a year of frail economic growth in 2005, euro area GDP growth should rebound to 2 per cent in 2006 while consumer price inflation should rise to 2.1 per cent. The pick-up in growth is largely based on a rise in employment, on now positive real wage growth and on continued favourable monetary conditions. Over the 2006-2012 period, the area’s GDP expands at an average annual rate of 1.8 per cent, notwithstanding the declining growth rate of the working-age population. Consumer price inflation should come out at an average rate of 1.8 per cent per annum over the period, edging up to 1.9 per cent toward the end of the period. The short-term interest rate is expected to rise from a year average level of 2.2 per cent in 2005 to 4.2 per cent in 2012 as the euro area’s monetary authorities move to ensure price stability. Assuming no policy changes, the area’s fiscal shortfall recedes only gradually from a deficit of 2.4 per cent of GDP in 2006 to 1.7 per cent of GDP in 2012.

Over the 2006-2012 period, GDP growth averages 2.8 per cent per annum for the group of countries comprising the United Kingdom, Sweden and Denmark. Real GDP in the United States is expected to rise at an average annual rate of 2.7 per cent over the same period. However, growth will most likely be uneven from year to year as, under current US laws and policies, a number of significant tax cut provisions should expire and stymie domestic demand growth over the projection period. At the same time, important fiscal and external imbalances should persist. Real GDP in Japan is expected to progress at an average annual rate of 2.1 per cent over the 2006-2012 period. Consumer price inflation should reach a year average rate of 0.5 per cent in 2006 and average 1.5 percent over the projection horizon. 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 a decline in the labour supply.

This issue also features a stochastic evaluation of the outlook’s results. This evaluation provides us with confidence intervals that indicate for instance that by the end of the projection period, there is a 95 per cent probability of GDP growth coming out between 0.3 and 2.6 per cent for the euro area; between 1.4 and 3.6 per cent for the Western non-euro EU Member States; between 1.5 and 3.2 per cent for the United States; and between -0.1 and 1.9 per cent for Japan. Similarly, the 95 per cent confidence interval around consumer price inflation in 2012 lies between 1.3 and 2.6 per cent for the euro area; between 1.1 and 2.9 per cent for the Western non-euro EU Member States; between 1.4 and 2.2 per cent for the United States; and between 1 and 3 per cent for Japan.