The global economy is expected to grow by 4% in 2004, according to The Conference Board of Canada’s World Outlook – Summer 2004. As the world economy continues to expand, concerns about inflation will lead central banks around the world to increase interest rates.

“Although rising interest rates are rarely viewed in a positive light, they represent an inevitable consequence of the growing strength of the world economy,” said Kip Beckman, Principal Research Associate. “In response to higher inflation, central banks have started the long process of shifting monetary policy from stimulating growth with low interest rates to ensuring that the expansion remains sustainable.”

In 2005, higher interest rates will slightly restrain world growth in real gross domestic product (GDP) to 3.2%.

Surging consumer demand and a revival in labour markets will drive the U.S. economy to 4.4% growth this year. China’s booming economy is expected to expand by 8.6% in 2004 and 7.7% in 2005, adding to inflationary pressures. As a result, the Chinese government has adopted measures to put a brake on the runaway economic growth, such as forcing banks to increase their reserve requirements.

Japan is benefiting from the strength of the Chinese economy and the improving U.S. performance this year. Real GDP growth of 4.1% is forecast in 2004, before Japanese growth weakens to less than 2% in 2005. The Japanese economy relies on exports to China, so even a modest decline in Chinese growth would hurt Japan’s outlook. Asia-Pacific as a whole will generate GDP growth of 4.4% in 2004.

South America’s real GDP is expected to grow by 4.3% this year, as Brazil and Argentina — its two largest economies — perform well. Lower interest rates are supporting growth in Brazil, while Argentina’s economy is soaring because of strong industrial production.

Europe will expand by only 1.6% in 2004, mainly because of a sluggish rebound in Germany, the region’s largest economy.

The prime risk to the forecast is surging oil prices, which surpassed US$40 per barrel recently and remain much higher than the US$29 to $30 per barrel range set a year ago. Prices are elevated because of the potential for terrorist attacks in the Middle East, as well as the growing demand for oil to meet higher economic growth in countries such as China and the United States.