The broadly favorable economic conditions that prevail in the world economy at present, should not lead, however, to complacency.
A first caveat to the generally optimistic scenario is that the current strength of the global economy remains largely cyclical in nature. As the forecasts for growth in 2005 indicate, this period of acceleration in growth is expected to end soon in many economies, particularly as stimulatory macroeconomic policies are phased out and the slack in production capacity is reduced.
An immediate challenge for policymakers worldwide, therefore, is how to sustain the present robust growth over the longer run. If they react to fears of overheating and remove policy stimuli too soon, they run the risk of choking off the economic recovery; if they act too late, they face the danger of sowing the seeds of exuberance and inflation and rectifying this will involve costs in the future.
As part of this short-term policy challenge, there is a need to take into account the risks to the world economy posed by the surge in oil prices over recent months. Since there has so far been no major long-lasting reduction in supply, DESA anticipates that oil prices will decline during coming months. If this fails to materialize, global growth could be compromised and policy makers would need to take pre-emptive measures.
The past few years have reminded us that economic cycles have not disappeared. The recent experience has also vividly demonstrated that the strength to weather adverse shocks is built up during upturns. This means that current favorable conditions should be used to address current potential weaknesses at all levels –from reducing the global external imbalances, to reducing internal domestic imbalances in both the public and the private sectors. If we are to withstand short-term downturns, it is imperative that we take advantage of the opportunities offered by current conditions to tackle some of our problems and to build defenses against future shocks.