Oil prices will have an impact on 2005 growth says the IMF

The IMF raised its forecast to 5% from 4.6% in what will be the strongest growth seen since 1973, if its forecast is accurate.

Rising corporate profits and strong housing markets boosted growth in 2004.

However, the IMF downgraded 2005's global growth forecast to 4.3% from 4.4%, citing oil prices as a concern.

In its twice-yearly World Economic Outlook, the IMF said 2005 growth "while still solid, will therefore likely be somewhat weaker than earlier expected".

It added: "The balance of risks has shifted to the downside with further oil price volatility a particular concern."

The global economy expanded by 3.9% in 2003.

'Vigilance needed'

IMF chief economist Raghuram Rajan said the rise in oil prices was likely to have only a moderate impact on growth and inflation in the industrialised world.

He said the developed countries are now more adept at dealing with oil price jumps and central banks have gained greater credibility in combating inflation.

But he warned emerging nations remained vulnerable and urged their central banks to be vigilant.

Worries about oil prices have heightened as crude soared to above $50 a barrel this week, amid increasing demand from China and India, and fears over supply disruptions in the Middle East and Nigeria.

Confidence

The IMF said the United States was still the main driving engine for global growth, with strong support from Asia, buoyed by a booming China.

There has also been a recovery in Latin America. while Sub-Saharan Africa has been boosted by higher oil output, an agricultural recovery in drought-hit areas, and improved security, it said.

It predicts US growth in 2005 will be 3.5%, compared with 4.3% this year.

The IMF said industrial production and business confidence are improving across Europe.

The IMF, which expects UK growth to reach to 3.4% this year then slow to 2.5% in 2005, says the biggest risk to the economy was the possibility of a sharp drop in house prices.

"Despite signs of cooling in recent months, prices still appear higher than can be explained by developments in fundamentals," it said.

Call to China

Growth in the emerging market countries of Asia "has continued to exceed expectations, despite the adverse impact of higher oil prices", the IMF said.

In its report, the IMF calls on China to drop the yuan currency's tight peg to the dollar to help keep domestic inflation under control and bring more balance to the global economy.

The IMF said such a move could help keep inflation from knocking China's booming economy off the rails.

It expects growth in China to be 9% in 2004 and 7.5% in 2005.

A downturn in its economy could hurt exporters in the region, including Japan, who depend on China, the IMF said.

The IMF said Japan's economy will grow at the fastest rate among the G7 nations this year at 4.4% as exports boost domestic consumption, but it will slow down next year to 2.3%.

It was optimistic that Japan had finally won the battle against deflation.