The world economy is expected to grow robustly during 2007 and 2008, but at a slightly lower rate than in 2006.’
According to the recent IMF WORLD Economic Outlook, the global economy grew by 5,4% during 2006. This is a 0,25 percentage point better than the IMF expected in its September 2006 outlook. A sharp downturn in the housing market and lower capital investment limited US growth while improvement in employment and lower oil prices had a positive effect on consumption.
The US economy grew at 3,3%, one percentage point up on 2005. Europe achieved its fastest growth rate in six years on the back of increased domestic demand and improving labour markets. The Japanese economy recovered from the slow-down in the middle of 2006.
Emerging markets grew strongly. China’s growth reached 10% in 2006, mainly as a result of investment and export growth. India’s economy grew at 9,25%. In other emerging countries, high growth rates were also maintained during 2006. The sharp increase in oil prices combined with strong economic growth resulted in inflation concerns at the beginning of 2006. A decrease in the oil price and tighter monetary policy resulted in a decrease in inflation. Advanced economies experienced 2,3% inflation in 2006. In emerging economies inflation was higher at 5,3%.
More growth to come
The world economy is still expected to grow robustly during 2007 and 2008, but at a slightly lower rate than during 2006 (4,9%). US growth will slow down to 2,2% during 2007. As the impact of the housing sector problems decreases, growth will probably improve somewhat during 2008. Growth will slow down slightly in Europe, as European central banks tighten their monetary policies. Higher commodity prices and support from favourable global financial conditions will result in fast growth in emerging markets. Commodity-rich countries in Africa, the Middle East and Latin America will continue to prosper. Growth in oil-rich African countries will accelerate.
Risks to growth
Various factors may result in lower than expected economic growth during 2007 and 2008. The IMF cites the US housing market as a major risk factor. However, IMF does not believe that problems in the US housing sector will adversely affect the rest of the economy as long as employment and earnings increase and interest rates remain low. Oil prices remain a key uncertainty. The decrease in oil prices from August 2006 has provided welcome relief to the global economy. However, prices increased again since the beginning of 2007 and may increase further in coming months. Option markets even indicate that oil prices may exceed by the end of 2007. The financial stability of the global economy remains at risk. Internationally, pressure on investors to get high yields has resulted in more investment in very risky instruments. Price setbacks, rising volatility and loan losses can result in a pull-back from overextended positions. Global imbalances between importing and exporting countries have decreases slightly, but remain risky.
The flip side
Despite these negative factors, other factors may result in higher than expected global growth. Domestic demand in Western Europe may increase at a faster rate than expected. Chinese and Indian economies constantly outperformed IMF predictions in recent years. This may also happen in 2007.
Implications for SA agriculture
Growth in European countries will have a positive effect on European prices for our traditional exports such as wool, fruit and wine. The real level of prices in South Africa will be determined by the value of the rand compared to the currencies of importing countries. The US dollar devalued on a trade-weighted basis by 1,3% from 2005 to 2006. Further weakening is expected due to the huge overdraft. The value of the rand decreased since mid-2006, in spite of a weakening dollar and this trend will probably continue. A weaker rand, especially in relation to the euro, will result in relatively higher prices for exports. The fruit, wool and wine industry can thus look forward to better prices on export markets.
The fast growth of emerging markets has already resulted in a sharp increase in international dairy and grain prices. However, US ethanol production probably played a bigger role in moving prices to higher levels. The fast growth of African and other emerging economies presents huge opportunities for the export of SA goods to neighbouring countries. Dr Koos Coetzee is an agricultural economist at the Milk Producers’ Organisation. All opinions expressed are his own. |fw
