Across the world economy, inflation is picking up, with the latest forecasts from the National Institute Economic Review (NIESR) projecting that private-consumption inflation will rise from 2.1% in 2005 to 2.5% this year.
In the US consumer inflation looks set to increase by 3.3% in 2006, up from 2.9% in 2005, while Japan will see consumption stop falling, with growth of 0.5% this year and 0.7% in 2007.
According to the NIESR, the economic outlook for the US has deteriorated, with a weakening housing market contributing to the slowdown in 2006 and 2007. The forecasts assume that house prices carry on rising, but more moderately. However, simulations reveal that a 10% drop in prices would lower consumer spend by 1.3% and GDP growth by 0.7% a year.
The economy is also expected to be held back by slower growth in exports, forecasted to rise in 2006 by 4.7%, compared with 6.9% in 2005.
In Japan, the era of recession seems to be ending as the economy continues to recover. Helped by last year’s depreciation in the yen, exports are projected to rise by around 7.5% a year. Home spend is expected to be supported by a pick-up in earnings growth, to around 2.5% a year.
Turning to the Euro Area, recovery is expected to be a modest affair, with GDP growth averaging at just 2% a year. The NIESR claim that the outlook could worsen if the German government raises VAT by 3%, as currently proposed.
If this happens, consumer price inflation in the Euro Area could be pushed up to 0.7% by 2007, resulting in GDP growth of just 1.8% a year in 2006 and 2007.
Related Links
