Asian growth stabilised in 2004 with a slight increase in China being offset by weakness elsewhere in the area. The increase in Chinese growth came despite tighter fiscal policy and strengthened controls over investment. The latter were only partially effective as high profitability continues to drive outlays in the ever more important private sector. The strength of exports, and the economy as a whole, was also related to the depreciation of the effective exchange rate that resulted from the extensive foreign exchange intervention to stabilise the Renminbi rate against the US dollar. This policy accentuated the increase in inflation. Going forward, domestic demand may slacken but rapid export growth will limit the slowdown and produce a marked increase in the current account surplus.

Growth in South America is estimated to have been above 5% in 2004, the strongest in almost 20 years. The strength of the Brazilian recovery was beyond market expectations. Growth continues to be driven by buoyant consumer demand in the major economies in the region, pushed by the recovery in employment and wages, and investment. Export growth also remains robust, due to favourable commodity prices and strong demand from OECD markets, as well as from China. Imports have surged on the back of robust private consumption and investment. Exchange rates have appreciated in the major economies, contributing to the maintenance of low inflation. Growth is set to continue in 2005-06, albeit at a lower pace than in 2004. The area-wide external current account is expected to remain close to balance at the end of the projection period, underscoring the region’s renewed resilience to potential future external shocks.

Russia and other commodity exporters among the Newly Independent States are expected to continue to benefit from very high prices for hydrocarbons and metals. However, Russian activity should slow, as the growth rates of both investment and export volumes have fallen and are unlikely to pick up again in the absence of steps to restore shaken business confidence. Nevertheless, Russia’s expansion is set to continue, as oil windfalls are increasingly used to finance expansionary fiscal policy and to fuel household consumption.