The global economy continued to grow strongly in 2005. Following a slight downswing in the second quarter, rapid expansion continued for the remainder of the year. Several sharp rises in the price of oil, particularly in the first half of the year, failed to impair the positive underlying trend. The world’s two major growth engines, the United States and China, once again performed very well, stimulating other countries’ economies with their thirst for imports. The business environment in the industrialized countries was further buoyed by favorable monetary conditions.

The pace of growth in the United States was practically undiminished in spite of adverse monetary and fiscal factors, and the hurricanes in the fall only temporarily impacted the economy. With the trade balance providing hardly any growth impetus, the economy was supported mainly by robust domestic demand. Higher corporate earnings triggered brisk investment activity.

Economic development in Europe was considerably more restrained. The euro zone fell behind the other major regions in terms of growth, although the economy picked up somewhat in the last few months of the year thanks to increasing domestic demand and a positive trade balance. Expansion was hampered by the high price of oil, the main effect of which was to hold back consumer demand. The moderate rise in output was solely the result of high demand for exports. While consumer sentiment remained downbeat, industry confidence rose toward year end and the overall economic outlook became a little brighter.

The Japanese economy continued to expand at a moderate rate during the year. The upswing was reinforced in the first half by the effects of positive political indicators on private consumption, and also by brisk export demand. Corporate investment also continued to increase in light of improved sales and earnings forecasts and high replacement demand. While economic activity had slowed somewhat by the end of the year, the overall trend remained positive.

Outside of the industrialized countries, production continued to expand steadily in 2005, if not quite as briskly as in the previous year. The Asian threshold economies developed well. Most of the major Asian countries registered strong growth in exports, with domestic demand also picking up. China continued to forge ahead thanks to higher exports and brisk domestic demand. Even the steps taken by the government to cool the economy have had little effect so far.

The economies of Latin America continued to grow thanks to relatively high raw material prices, although the upswing lost some of its momentum. This growth was driven primarily by raw material exports. Domestic demand picked up, contributing to the favorable overall picture.