Forecasts of the Scottish economy [February 2005]

Growth in the world economy is relatively strong (despite the weak data in the summer and a slight slowing in China). Strong growth in the US, China and Japan are driving the world economy. The Euro Area remains relatively weak but is expected to pick up in 2005-06. The world economy is expected to grow at a considerable pace (close to 4 per cent) in 2004 but growth is forecast to be slightly less in 2005. World trade is forecast to grow rapidly in both 2004 and 2005 (just below 10 per cent for both years). Chinese trade flows and the importance of trade in Asia are the most significant contributions to this growth.
The UK continues to enjoy the benefits of growth and trade accruing from the US and expanding new markets in the Far East, especially China. We are also expecting growth to benefit from the forecast recovery in the Euro Area and to reap rewards from domestic demand. When UK GDP growth for 2004Q3 was recorded as only 0.5 per cent this was unexpected. Fourth quarter growth appears to be much stronger at 0.7 per cent. Employment remains relatively strong while unemployment is low. Inflation is also low and stable despite recent surges in both house price inflation and the oil price. Interest rates appear to have stabilised at 4.75 per cent. Consumption, government spending and investment are the main drivers of UK growth.