The Results of the World Economy for 2005 and Forecasts for 2006


For the world economy 2005 was the year of sharp increase of prices for oil and precious metals. Serious increase of discount rate for regulating of inflation threat caused suspension of economic growth.

The US economy keeps on growing. The annual indicator of the third quarter makes up 4.3%, which is rather a high rate in comparison with the first quarter of 2004. The general rate has decreased but, if we take into account two hurricanes on the coast of the Gulf, it can be said that the situation is normal.
During the July-September period the Chamber of Commerce has established a 3.8% growth of the GDP. Consumer spendings on nondurable goods, like food products and clothes, has increased.
Minimum annual economic indicator which is ranging from 3%to 3.5% is a good sign of growth. In spite of all this, the problem of inflation has become the subject for annalists’ consideration. According to the Federal Reserve System, consumer spendings, with the exception of food products and energy, has decreased, and prospective inflation indicator was 1.2%, which is 0.1% less than the initial indicator. It would have been the lowest inflation indicator over the past two years.
Alan Skrainka, together with the main market strategist Edward Johnston, says that the Federal Reserve System has stood in good stead by increasing of the rates in order not to allow inflation to have an impact on the system. “Beige book” of the Federal Reserve System is the sum of economic activity and was created for the central bank’s political meetings. Representatives of the Federal Reserve System say that in most regions the economy is growing at good rates, but in some regions the situation is complex. In Saint Louis and Philadelphia regions the rate of economic growth is low.
According to the report of the Chamber of Commerce, the annual indicator of consumer spendings has increased by 4.2%, which exceeded the fixed 3.9%. Purchase and sales of cars and refrigerators has considerably decreased, profits from nondurable goods has grown by 3.6% and exceeded the fixed 2.8%. Consumer spendings in housing sector made up 8.4%, business investment spendings – 8.8%, which considerably exceeds the fixed 6.2%.
At the same time, the total revenues as a result of taxes has decreased by 3.7% and made up 938.5 billion USD. Chief economist of Bank of America – Peter Cretsmer says that it is mainly stipulated by insurance payments as a result of the hurricanes, but, in spite of all this, the revenues made up 9.4%.
According to forecasts, the US budget deficit will keep on decreasing from 2006, and by 2009 it will make up a half of the 2004 indicator – in 2004 the deficit reached its climax.
The Federal Reserve System is increasing the rate and the game is approaching the end. The Federal Reserve System’s chairman Alan Greenspen and his colleagues are increasing short-term credits interest rate, but, according to their message, the eighteen months long campaign for controlling inflation is coming to the end.
Economist Diane Swonk: “It is a good news that this campaign is coming to the end, it is bad that this game will not be over before Greenspen’s retirement”.
Greenspen who has spent 18 years at the post of the Federal Reserve System’s chairman will retire on January 31 and his post will be taken up by Ben Bernanke, if the Senate will approve his candidacy.
It is expected that Bernanke will continue Greenspen’s policy, though analysts have a separate opinion in this respect. Swanck says that Bernanke is given a good chance to draw up his own agenda.
According to politicians, increasing of rates in the coming year is expected for retaining stability of prices and economic growth. In short, one part of analysts is expecting stopping of increasing of rate by the Federal Reserve System by middle of 2006, and others believe that this game will continue for a long time.
According to the latest data, the economy is developing at rather high rates, though destructive hurricanes caused price increase for energy and tens of thousands of people remained without accommodation, which has had an effect on the economy’s development.
In short, as it was pointed out, increasing of oil prices was stipulated by natural cataclysms in the Caribbean Sea and the Gulf of Mexico, and also by unprecedented boom of Chinese economy, as a result of which the demand for oil products in this country has increased.
Chinese economy is developing at extremely high rates. GDP in 2004-2005 made up 8.1%; in 2005-2006 this indicator is expected to be from 4.5% to 5.5%. Deflation in 2004-2005 made up 0.4%, in 2005-2006 the expected inflation indicator – 1.5%. China’s total growth makes up 12 billion USD. Total budget deficit in 2005-2006 will make up 10.5 billion USD. According to the forecast, the total growth in 2008-2009 will make 24.9 billion USD. According to the government’s plan, by 2008-2009 the state reserve should make up 323 billion USD. Increasing of tax tariffs in China is not expected. The country’s president Hu Jintao that high rates of the economy’s growth give other countries an opportunity to use China’s huge market: “China’s development will be useful not only for our 1.3 billion population, but for the world as well. We offer a huge market and extraordinary opportunities to it”.
China has the second largest economy in the world, and produces 13% of the world produce. Its GDP in 2004 made up 9.5%. The progress in the country’s economy is a result of the policy orientated for investments and export.
In spite of insignificant difficulties, Asian economy is still strong. For instance, India produces 6% of the world produce. Economic activity of the country in 2005-2006 increased by 6%. India’s economy holds the fourth place among the countries having the largest economies. In 2005-2006 its GDP index is 8.1%, 2005-2006 annual budget – 118 billion USD, tax revenues make up 63 billion USD, and fiscal deficit – 32 billion.
In spite of the fact that in 2004 the index of Japan’s economic growth was 2.6%, the economic activity of the country is decreasing because of shortening of investments in China and increasing of oil prices, the export has decreased as well. As a result, Japan’s economic growth in 2005 will be 1% less, and in 2006 it will increase by 1.7%. Economic activity growth of its main partners – China and the US has an impact on the development of Japanese economy.
In view of sensible finance policy, rising in price of oil products, as economy’s multiplier, has not triggered the inflation wave which was expected. However the prices for gold and palladium have grown unprecedently. Economic growth in the US, Europe and Japan was also less than expected.
It can be said that moderate economic growth was observed in Europe. Economic activity in Europe in 2004 increased in comparison with 2003. In 2003 the growth of its index made up 1%, and in 2004 – 2.3%. Analysts say the growth trend will continue. According to the forecast, GDP indicator in 2006 will make up 2%. European economic growth was largely stipulated by Germany’s contribution, which has been going through the period of economic stagnation for two years. It produces almost 20% of European output, and the budget increase is stipulated by the great demand for its produce abroad (motor-cars, machinery, and chemical industry’s produce). Germany’s GDP in 2006 will make 1.4%, while budget deficit in the country – 3%.
In the Caucasus region, Azerbaijan was distinguished by economic growth.
Current economic situation in this country is very positive, its driving force is investments in the oil production sector. According to the plan, the GDP growth in 2005 should make up 14.5% in 2006 – 19.0%, and in 2007 -22.0%. With enabling of a new oil field Azerbaijani government is expecting increase of oil export in 2006. Natural gas production should also start at Shakhdeniz field, which, naturally, will reduce gas import and promote export. With increasing of revenues, the consumer import will decrease, and by 2006-2007 there expected a reduction of total import.
Azerbaijan has trade relations with 130 countries, and is the largest EU’s partner in the Caucasus region. Over the past two years foreign commodity turnover has increased by 25% and made up almost 1.6 billion USD. In future, during the 10 year period, foreign investments in Azerbaijan will exceed 28.7 billion USD. The country’s inflation indicator for January-July 2005 was 12.1%, and presumably it will increase by 5% by the end of the year. In 2005 the foreign trade deficit made up 955786.3 USD.
As they believe in Azerbaijan, soon the country will wallow in money. “Villa Nobel” palace was built in 1885 when Baku acquired a taste for oil for the first time. During the soviet period it was ruined, but now the restored for 3 million USD wonderful palace raises hopes for better future still more. Soon oil will be transported from Baku to Turkish Mediterranean port Jeikhan. 1 million barrels a day will be produced. At the beginning of the coming year a huge cash inflow to the country is expected. The president of BP in Azerbaijan says that by 2010 the revenues will increase two fold, and in 2006 a 20% economic growth is expected.
However Azerbaijan is not the only country that “hit the jackpot” from oil and gas projects. Along the coast of the Caspian, Kazakhstan also profits by foreign investments in the energy sector. But the West warns us that while these countries are “cleaning” their corrupted political systems, they may curse their hate because of “black gold”. Azerbaijan’s corrupted reputation arouses big anxiety, but in spite of everything this huge project will contribute to the development of the country’s economy. “Baku was born anew, and soon we shall wallow in money”- that is the general idea.
Russia holds a rather important place on the world energy market since it the largest natural gas reserves in the world. In 2004 the growth of Russia’s GDP made up approximately 7.1%. The growth of the country’s economy largely depends on oil and natural gas export. In 2005 the GDP indicator should make up 5.5% and the budget revenues, including taxes – 17.1% of the GDP, while expenditure – 16.2%. In 2006 the budget revenues, including taxes, should make up 16.7% of the GDP, and the expenditures – 15.2%. Russia’s budget increasing in the current year makes up 0.5% of the GDP.
Among the G7 countries, Russia holds the first place according to GDP indicator – 6.1%, the USA – 3,6%, Canada – 2.7%, Japan – 2.3%, Germany – 1.6%, Great Britain – 1.5%, France – 1.1%, Italy – 0.1%. In spite of it, according to the French headquarters, slump of Russian economy in the coming years is expected. According to the experts of this organization, this year its GDP indicator will make up 6.1%, next year – 5.7%, but by 2007 – 5.3%. Inflation indicator will decrease from 11.3% to 10.7%, and then to 10% – “Ria” agency reports.
As it was expected, natural gas prices have increased all over the world by the end of the year, and reached 20 USD per 1m3. It is interesting, who fixes natural gas prices.
Natural gas price increase is stipulated by many reasons. Growth of the economy automatically entails its rising in price. New electric plants need more fuel and since, in comparison with coal and other alternative variants, gas burns cleaner and oil has increased in price, factories often use natural gas instead of oil.
The US suppliers are struggling for retaining of prices. In spite of all the efforts to improve natural gas production, it is still decreasing, since the resources of own fields are exhausted, let alone the two hurricanes in the Gulf which disabled the systems and caused tremendous production losses.
Natural gas suppliers try to compensate the difference at the expense of import of the product most part of which is implemented by means of the Canadian pipeline, though this resource is exhausted too. However, there is also one way left – importing of natural gas by tankers. This is the weakest point of the shaped situation – there are not enough terminals. Natural gas from other countries is delivered to Europe where prices are high as well.
For winter period the US natural gas suppliers have 3 billion m3 of gas in stock, which is 5% less compared to the last year’s stock
In short, the preliminary prognosis for natural gas prices largely depends on weather forecast. Inclement winter will completely exhaust the stock. Natural gas prices also depend on place of residence: in those regions of the country where natural gas is produced and which are located near the pipeline its price is lower in comparison with the regions where gas is transported by tankers.
In spite of elaboration of many projects, it will take years to solve this problem. According to the forecast of the Energy Department, by 2010 the US will import 8% of gas, and by 2020 – 14%.
Relations between “Gazprom” and Georgia begin at the end of 1990 when Georgia started negotiations with “Gazprom” concerning creation of “Gruzros-Gazprom” joint-stock company. But in 2002 the negotiations stop at the initiative of the Georgian side, since official Tblilisi believes that joint-stock company of this kind will have a negative impact on the country’s energy sector.
In July 2003, the director of “Gazprom” – Aleksandr Miller and the Minister of Fuel and Energy of Georgia – Davit Mirtskhulava sign an agreement for 25 years, which, besides strategic partnership in natural gas industry, envisages the issues concerning reconstruction of production transportation system. The country’s opposition, including Zurab Zhvania, calls this “a betrayal of the country’s national interests”.
After “Itera”, from October 1, 2003 “Gazexport” starts to supply gas to Georgia but the prices for it does not change (Tbilisi wanted to have two suppliers, but “Gazprom” did not give “Itera” an opportunity to stay).
In September 2004, Zurab Zhvania, who was the prime minister at the time, holds a business meeting with “Gazprom’s” delegation at which the issue of privatization of Georgian natural gas industry is considered. “Gazprom” was ready to pay “Tbilgaz” 300 million USD, but the Georgian side wanted 540 million, that is why an agreement was not reached.
Because of the accumulated debts, “Gazprom” (like formerly “Itera”) regularly decreases supplies of the produce. The main cause of accumulation of debts is low financing on the part of the Georgian government and miserable budget. It is also noteworthy that there appear political tensions between Georgia and Russia. For instance, it happened so in June 2004, during well known events in South Ossetia – gas supplies to Tbilisi were stopped.
In October 2004 “Tbilgaz” and “Gazprom” sign an agreement on gas supplies to Georgia in 2005 (at the price of 60 USD per 1 000 m3). Georgia’s debt since 2003 reaches 8 million USD and our solvency is in doubt again.
Based on the above-mentioned, we can suppose that 2006 will be marked by the following – rising in price of energy resources, slowing down of economic growth rate, increasing of investment in precious metals.
In spite of the fact that gold price for 16 years has reached its climax, they suppose that it will rise in price again. The price of dollar is decreasing and gold gains more luster. Investors prefer to chose hard currency for investments, and with dollar’s weakening they always resort to gold, a huge amount of dollars is spend for buying dollars and the price of this noble metal is growing.
When crude oil rises in price, it means that all consumer goods increase in price as well, which is the first sign of inflation, and in view of this fact the world becomes panic-stricken. Gold is considered to be the best mean against inflation.
India is the largest gold consumer. It has bought almost 13 000 tons of gold. The demand for it has grown along with increasing of population’s incomes.
Do you know the first economic lesson? – If demand exceeds consumption, price increase for production is inevitable. A central bank that has huge gold reserves will not put it on sale since, in this case, its price will drop. In view of short supply of produce, the price for the yellow metal may exceed the record of its cost – 850 USD per ounce (1 ounce=28.35 gr.).
That is why the development of the Asian wing of the world economy and business, capital and technologies will be transferred to China which again will be the leader with its 8.8% growth. Presumably, 2006 will be the year of increasing of inflation, economic downturn, decreasing of consumer confidence index, and unemployment growth.