World Overview: Oil Prices and the Fiscal Stance

At the global level, GDP growth accelerated to 1.2 per cent in the final quarter of 2010 according to NIESR estimates — largely driven by a sharp rise in domestic demand in China, which more than offset a slowdown in world trade growth that originated in the US. The economic recovery in the advanced economies remains lacklustre. The sharp rise in the oil price in recent months has exacerbated the effects on output of the protracted downturn in global investment and a tighter fiscal policy stance, at least in Europe. High commodity prices will push inflation in the OECD close to 3 per cent both this year and next. At the global level we expect GDP growth to moderate from an estimated 5.2 per cent in 2010 to just below 4½ per cent per annum in 2011–12, with around half of this slowdown attributable to the effects of the increase in oil prices between October 2010 and April 2011. The key assumptions underlying this forecast are discussed in Appendix A, with our forecasts for key macro variables in 40 major economies detailed in Appendix B.