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Powered by China, world economy to grow 5%
Updated: 2004-09-30 08:58

The world economy, powered in part by China, will grow this year at its briskest pace in almost three decades -- five percent -- before losing steam in 2005 in the face of higher oil prices, the IMF said.

In its latest World Economic Outlook report the International Monetary Fund also warned that global imbalances, notably gaping deficits in the United States, still pose a key risk.

The semiannual report, issued ahead of a meeting of IMF and World Bank policymakers, said controlling resurgent inflation was the main short-term challenge for US and other industrial country policymakers.

The Fund in addition said a soft -- non-disruptive -- landing to China's sizzling nine percent growth rate was achievable provided authorities there acted decisively.

For the global economy the IMF boosted its 2004 projection to five percent from an estimate of 4.7 percent issued last April.

"Over the past year, the global recovery has become increasingly well established, with global GDP (gross domestic product) growth now projected to average five percent in 2004, the highest for nearly three decades," said the report.

But the Fund cautioned that global momentum would cool off next year, with the pace of growth falling to 4.3 percent, down 0.1 points from the April estimate.

"These are still very healthy numbers, although given the continued volatility in the oil market, the risks are to the downside," IMF research director Raghuram Rajan told a press conference.

The pace has already slowed this year from the second quarter in the United States, Japan and China, the IMF said, concluding that "the global expansion -- while still solid -- will therefore be weaker than earlier expected."

The IMF lowered its growth projections for the United States, still the principal force in the world economy, to 4.3 percent this year from 4.6 percent in April and to 3.5 percent in 2005 from 3.8 last April.

"This is a soft patch not a sink hole," Rajan said.

The Fund raised its 2004 outlook on Japan by 1.1 points to 4.4 percent this year and by 0.5 points to a sharply reduced 2.3 percent in 2005.

It said the negative impact of Japan's traditional difficulties -- deflation and financial and corporate sector weakness -- were easing.

"While growth slowed sharply in the second quarter, recent data suggest the near-term outlook remains solid," it added.

The report predicted that the Chinese economy would expand nine percent in 2004, rather than the 8.5 percent foreseen in April, before throttling back to 7.5 percent in 2005, a downward revision of 0.5 points from April.

The 12-nation eurozone was meanwhile expected to see no pickup next year in its growth pace of 2.2 percent in 2004. The eurozone recovery has been "relatively weak," heavily dependent on externnal demand rather than domestic consumption.

The IMF said that while the health of the world economy was essentially sound, and would likekly remain so next year, the horizon was far from cloud-free. It noted in particular:

-- The oil market is "highly vulnerable" to shocks -- from terrorist attacks and surging demand, for example -- with spare capacity expected to remain low for the rest of the decade.

-- A US current account deficit that if corrected too abruptly could spark a sharp fall in the dollar followed by higher US interest rates and dampened growth in the United States and elsewhere.

"Even an orderly adjustment carries risks, given the central role that the United States has played in supporting global growth in recent years," the report said.

-- A possible "hard landing" in China, a sharp contraction in the economy, could hurt other countries in the region that depend on China as an export outlet.

The IMF noted that Chinese authorities had already taken steps to curb credit and investment and said that in most cases the global economy could withstand a sharp fall in Chinese imports.

-- Inflationary pressures could prove to be more acute than anticipated, driving up interest rates and unsettling financial markets. Inflation in the world's advanced industrialized countries was set to reach 2.1 percent this year after 1.8 percent in 2003.

The IMF described the US Federal Reserve's gradual approach to tightening monetary policy as appropriate but said it was accompanied by "considerable uncertainties" about the strength of the US recovery.

Latin America, according to the report, was enjoying "an increasingly well-established" recovery, while in the Middle East growth forecasts had been revised upward in response to higher oil prices and production.

Although an expansion was underway in central and eastern Europe, it was menaced by large current account and budget deficits, the IMF said.

In sub-Saharan Africa GDP growth was revised upward to 4.6 percent this year but the Fund again warned that Africa would fall short of the Millennium Development Target of halving the proportion of people living in poverty by 2015.

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