4 CDB Annual Economic Review 2006 International Economic Developments Overview The global economy continued to expand during 2006, with high growth rates in the East Asian economies (particularly in China and India, but also including the traditional Asian “tigers”) refl ecting both internal dynamics and demand and investment from members of the G8 group and from the broader OECD membership. Global GDP growth was estimated at close to 5%, compared with 4% in 2005; and was driven by expansion in economic activity in both developed and developing economies. The Eurozone unexpectedly expanded at its strongest rate since 2000, while Japan continued to recover, under the stimulus of a rise in domestic spending and strong demand in East Asia. Growth in Canada, Australia, and in resourceriic emerging economies refl ected, in part, strong demand for commodities, particularly fuel and metals. Increasing competition for commodities was evident in external foreign policy initiatives in developing countries, particularly in Africa, aimed at securing access to raw material supplies over the medium term; while effort continued in other countries, including Brazil, to expand the use of indigenous substitutes for imports, especially in relation to fossil fuels. High commodity prices, with fuel prices being the outstanding case, and the availability of supplies, were refl ected in continuing shifts in political infl uence and power among and within countries; and, together with ongoing technological advances, particularly with respect to information management and communications, continued to contribute to changes in the pattern of economic relations both globally and within the Caribbean region. Infl ation Declining excess production capacity globally and falling unemployment rates contributed to increasing price pressures, largely felt in developed economies, but increasingly in emerging economies. International Economic Developments The rise in energy prices has been a major component of the heightened infl ation concerns, as core infl ation climbed above target rates, albeit slowly. Crude-oil prices during the year averaged $66 per barrel, reaching record highs on occasion; these developments lent renewed urgency to the search for alternative (and renewable) energy sources, particularly in the context of growing environmental concerns over the global climatic effects of the continued high rate of production of greenhouse gases. The location of fossil fuel supplies, and the supply uncertainty and political tensions associated with some of those locations, contributed both to price levels and to supply price volatility, leading to planning diffi culties in some countries and to windfall profi ts for multinational firms in others. Interest Rates and Currencies The tightening in commodity and labour markets prompted interest rate increases by the major central banks. However, towards the second half of the year, following increasing stability in the major resource markets, oil prices fell below $65 per barrel for the fi rst time in over a year, although some price volatility remained. This, along with some evidence of a weakening in the US housing market, which had sustained consumer spending, contributed to the US authorities’ halting their programme of monetary tightening in August after almost two years, although core inflation remained an issue. In contrast, in the UK and Europe, with continuing economic expansion and, in particular, strong real estate sector growth, infl ation remained above trend and, supported by strong currencies, provided no evidence of a weakening. The policy stance was accordingly tightened in both the UK and Europe. In Japan, given evidence that the defl ationary period had ended, the Central Bank removed its zero interest rate policy in the third quarter of 2006.International Economic Developments CDB Annual Economic Review 2006 5 While growth continued in the OECD area as a whole, the greater level of uncertainty in the US, partly related to political issues, including the various aspects of the war on terrorism, and partly related to aspects of economic performance, including the high fi scal and external current account defi cits and the low domestic savings rate, contributed to a weakening of the dollar on currency markets, particularly against the Euro. Outlook and Risks Despite mounting evidence of a slowdown in the US economy, world economic growth is expected to continue, ranging from 4% to 5% for 2007, partly refl ecting ongoing expansion in the rest of the OECD area and in the major emerging market economies, although the pattern of global imbalances poses some risks for the future. The main threats are likely to come from higher than expected inflation and interest rates, a housing slowdown in the US driving a sharper downturn in the domestic market in that country, a feed-through of the political instability associated with the war on terror and in the Middle East to the rest of the world, and a signifi cant slowing in Chinese economic growth. Partial data suggest that the US and China have contributed signifi cantly to global growth in recent years; if true, a fall-off in this contribution could have substantial contractionary effects.