The world economy [March 2006]

It would be tempting to say that all is rosy in the world economy with relatively strong growth and stable inflation. However inflation is rising across the globe but the impact of the rise in oil prices on wage inflation is weaker than expected. The effect is slightly more pronounced however in the US where unemployment is relatively low compared to Europe which has higher unemployment. This suggests that monetary policy will be more likely to be tightened in the US than elsewhere. It is probable that deflation in Japan will end this year and China and Asia are set to perform strongly despite rising oil prices. These economies have experienced strong export growth but increasingly the balance is shifting as domestic demand is driving these economies forward.