A German Glimmer in a Global Boom

In 2004, the world economy grew at a rate of 5.1%, the fastest pace in the last 28 years. While Ifo`s World Economic Climate indicator, generated from quarterly surveys of 1,200 experts in 90 countries, worsened slightly during the first three quarters of 2005, it rose again in the last quarter, indicating a continuation of the boom. In 2005, growth is estimated to have been about 4.3%, and a similar rate can be expected in 2006, marking a period of sustained rapid global growth unseen since the 1970’s.

But the boom is not uniform. In the United States, the number of experts giving a favorable assessment of the current situation declined; indeed, a majority believes that the economic situation will worsen during the next six months. However, in the Asian countries, including China, the optimism is unbroken. The same is true for Eastern Europe, the ex-Soviet states, and Latin America.

The big surprise is Europe, which, unlike in 2004 and the first half of 2005, now seems to be catching up with the rest of the world. Whereas growth was a miserable 1.5% in 2005 in the 15 “old” members of the European Union, Ifo expects EU-15 growth to accelerate to 2.1% in 2006.

To be sure, economic performance will vary widely among EU countries. While Italy will be the laggard, with only 1.1% growth, the Irish rocket will not lose its force, pushing real GDP up by about 4.8%. In general, the big EU countries are still performing badly, in contrast to the smaller members – hardly surprising, given that the EU is basically an institution to help the smaller countries overcome the drawback of their size by extending the agglomeration advantages that formerly were reserved to the bigger countries.