The State of the World Economy and the German Economy in the Spring of 2006

On 27 April 2006 the German economic research institutes presented their Joint Economic Forecast to the press in Berlin. They summed up that in the spring of 2006, the expansion of the world economy remains strong. In the course of the past year, it gained in breadth. While US output kept following a rising trend and the rapid growth of the Chinese economy continued unabatedly, the phase of economic weakness which had started in Japan, in the euro area and in many newly industrialising countries in the second half of 2004 was gradually overcome. As a result of favourable company profits, rising asset prices and low interest rates, the recovery forces are so strong that the dampening effects of higher raw material prices were more than offset. Last autumn inflation had temporarily risen in the industrialised countries due to higher energy prices. There have been no second round effects, however. Sustained low inflation expectations are an important reason for only low rises in long-term interest rates. The world economy will continue to expand briskly, albeit somewhat more slowly than before due to the diminishing expansionary effects of monetary policy and slightly rising bond rates. The cyclical gap between the industrialised countries will continue to narrow. World real gross domestic product will increase by 3.4% in 2006 and by 3.1% in 2007. World trade is expected to grow by 8.5% and 7.5% for the two years respectively. Global disequilibria, especially the US current account deficit, are unlikely to diminish. In the euro area the economic recovery will continue. The forces driving the upswing remain very different in the various economies.