With supply so tight, oil prices are expected to remain volatile

In its twice yearly assessment of global economic prospects, the IMF said it expected "solid expansion" in 2005, albeit at a slower rate than 2004.

However, it stressed that continued volatility in world oil prices could hamper economic growth.

It also argued that growth would be lopsided, with the US and China outperforming Europe and Japan.

'Volatility'

Launching the IMF's latest World Economic Outlook, its chief economist said that the strength of demand for oil from China and India had caught the international community by surprise.

Crude oil prices rose above $55 a barrel last month, prompting Opec to lift production quotas by 500,000 barrels a day.

[China and India] will need to consume more oil and somehow we have to find the space Raghuram Rajan, International Monetary Fund

However, with a tight balance of supply to demand, many experts believe output may have to rise again.

"Clearly the rapid growth of emerging economies, like China and India, have played a part," said Raghuram Rajan, IMF chief economist.

"These countries will need to consume more oil and somehow we have to find the space."

Slower growth

In 2005, the global economy is expected to recover from a downturn in growth in the second half of 2004 caused by a slowdown in trade and industrial production, the IMF said.

However, growth is projected to be lower than in 2004, gross domestic product (GDP) rising 4.3% compared to 5.2% last year.

Output is expected to remain approximately the same in 2006.

Despite the damage, the tsunami's economic impact may be modest

Although the US and Chinese economies continue to enjoy strong growth, the economic performance of Europe and Japan has been "disappointing", the IMF said.

Germany and Japan are projected to generate growth of less than 1% in 2005, although the IMF expects a gradual recovery in both countries from 2006 onwards.

Overall economic conditions remain benign, the IMF believes, with inflation largely subdued and stock markets performing strongly.

Tsunami impact

The full economic costs of the Indian Ocean tsunami cannot yet be properly calculated, the IMF said.

Although the impact will be "sizeable" in many areas, in most cases it does not expect the disaster to have a major impact on economic growth.

Sri Lanka, whose fishing and agriculture industries were severely damaged, and the Maldives, whose tourism industry was temporarily wiped out, are expected to be the worst affected.

The Maldives could see its output fall by up to 5.5% this year.

Depending on the success of reconstruction efforts, however, the IMF said it was still possible for some countries to still meet pre-tsunami economic forecasts.

"Despite the appalling human cost and physical destruction and the substantial budget and balance of payments implications for some affected countries, the impact on growth is expected to be modest," it said.