2006 will be an improvement on 2005

In terms of overall growth, 2006 will be an improvement on 2005, with the world economy now set to expand by 5.3% (measured using purchasing power parity-PPP-weights).

In terms of overall growth, 2006 will be an improvement on 2005, with the world economy now set to expand by 5.3% (measured using purchasing power parity-PPP-weights).

This is also reflected in the forecast for world trade growth, which is expected to hit 9.3%.

But a slowdown in certain parts of the developed world is in its early stages and will affect world growth going forward.

This shows up mainly in the forecasts for 2007, with the world economy now expected to expand by 4.7%.

Key changes from July 28 are as follows.

* Recent data confirm that 2006 will be an improvement on 2005, with growth set to accelerate to 5.3% (weighted using PPP exchange rates), from 4.9%.

But a global slowdown is now in its early stages, and this will show up mainly in forecasts for 2007.

The world economy is now forecast to expand by 4.7% (previously 4.8%) in that year.

* The Economist Intelligence Unit has revised down its forecast for US growth in 2007 to 2.2% (previously 2.4%).

Although not its baseline forecast, the company does not rule out one or even two quarters of contraction.

While the EIU expect the Federal Reserve (central bank) to raise rates one more time before the end of 2006, it is looking increasingly likely that the monetary policy tightening cycle may be done.

* The Economist Intelligence Unit has revised upward its forecast for real GDP growth in the euro area to 2.3% (previously 2.1%) in 2006.

Recent data for the second quarter reveal that economic expansion was stronger than expected.

* The Economist Intelligence Unit has revised downward its forecast for Japanese growth to 2.8% (previously 3.1%) in 2006.

Exports were much weaker than expected in the second quarter, although consumer and business investment demand remained strong.

Growth is now expected to run around 2.2% (previously 2%) in 2007.

* The Economist Intelligence Unit's forecasts of Japanese interest rates have changed significantly.

Rapidly rising corporate-goods prices, rising import prices and the strength of the domestic economy lead the company to believe that the Bank of Japan (the central bank) will raise rates more aggressively in 2007.

* The Economist Intelligence Unit has revised upwards its forecast for average oil prices in 2007 to US$70/barrel (previously US$66/barrel), essentially the same as its expectations for this year as a whole (US$71/barrel).

The EIU expects spare capacity to remain tight this year and next, especially as demand from China remains exceptionally strong.

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