Part 1: The Big Picture for 2005

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Trying to forecast what's going to happen over the next twelve months always involves a look at the year just gone. A year ago we forecast a general continuation of things as they were at the end of 2003, and so it was.

In politics there were few surprises with elections in the U.S. and Australia returning their governments and proving that voters might grumble but they tend to stay with the leaders they have. The Olympics came and went without incident and the war in Iraq continued. Even the big four remained numerically the same.

Call them what you like - 'pundits', 'experts', or soothsayers, the professional forecasters are anything but uniform in their outlooks for 2005. This is typified by Australia's ABN AMRO whose own strategists have radically divergent views. Chief equity strategist Gerard Minack forecasts an international economic downturn that will be drawn out 'over three to four extremely painful years'.

His colleague, credit strategist Craig Saalmann, looks at the global corporates and says 'most of them have done very, very well and the outlook for 2005 is still pretty supportive'In fact, they are going to have a better year in 05 than 04'.

In many ways the biggest question mark for 2005 is the future of the U.S. dollar. If it strengthens it means the U.S. will continue to purchase the goods and services originating in other countries, thereby exporting growth to the rest of the world. If the U.S. currency nosedives for whatever reason worldwide growth will slow, and quickly.

So, which direction will the dollar take? There's general agreement that the U.S. deficit is unsustainable and that the American economy is powered by the savings of its trading partners, but nobody's game to pull the plug. Oil prices are easing at the year's end which will help the situation, and even if other countries worry about dealing with a nation that's running up the world's biggest-ever debt who else will purchase what they manufacture?

The UK's National Institute of Economic and Social Research says that 'the outlook for 2005 is continued robust expansion of 4.1 per cent. World trade in goods will rise by 10.2 per cent in 2005'.

On the negative side, a leading U.K. business group cut its 2005 forecast for British economic growth blaming a combination of high oil and commodity prices, slowing global growth and domestic interest rate rises. The Confederation of Trade and Industry lowered its forecast for gross domestic product growth, or GDP, in 2005 by 0.3 percent to 2.5 percent.

Semiconductor analyst firm Semico Corp. sees 2005 as "a bump in the road' and says that slower economic conditions overall will contribute to the bump. It says that gross domestic product for the United States in 2005 will be only 2.2 percent compared to 2004's 4.5 percent.

Semico also says that inflation is beginning to build, oil prices are high, and interest rates are edging up. China however is still booming with an 8.9 percent GDP this year which will fall back slightly to 8.1 percent in 2005. Inflation will also slow in that country to 3.5 percent next year from 3.8 percent this year, according to Semico.

The Economic Intelligence Unit, a UK-based think tank, says the global economy is set to slow down during 2005, and the deceleration could turn into a full-blown slump if one of a number of potential threats took hold.

Overall, world gross domestic product (GDP) growth using market exchange rates would slow from 4.1 per cent this year to 3.2 per cent in 2005, the EIU said in its annual forecast.

Among individual countries, China would again be the fastest-growing major economy at a rate of 8.1 per cent, while growth in the United States would slow to 3.1 per cent, the EIU's "2005: country by country" report said.

The O.E.C.D., a Paris-based economic forum for 30 leading industrial nations, cut its forecast for growth in the United States in 2005 to a 3.3 percent annual rate from the 3.7 percent rate that it originally predicted.

The group's report was even more downbeat on prospects for America's main trading partners. It warned that growth in the twelve nations that use the euro as their currency could slip to a rate of just 1.9 percent. Japan, despite a "spectacular comeback" this year, may experience growth of no more than 2.1 percent in 2005, the O.E.C.D. said.

Threats to the 'soft landing' picture certainly exist. These include another sharp spike in oil prices, rapid and large interest rate increases, and a substantial fall in the value of the U.S. dollar.

Another dark cloud on the horizon is the possibility of a sudden slowdown of the Chinese economy. Any of these threats could happen and have the potential to turn a slowdown into a slump.

So what, in summary, do we see ahead for 2005? The most likely outcome is a slowing of economic activity, but not a real slump. Oil prices are easing and interest rates seem relatively stable. As always, there are real opportunities for entrepreneurs who pick trends and make the most of them.


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