...cent this year, with the global economy projected to remain strong throughout our forecast horizon to 2013. Prospects for growth in both 2006 and 2007 have improved slightly over the last three months, due to decline in oil prices, a more favourable outlook for the US and no sign of a significant slowdown in China. While growth at the global and OECD level is expected to moderate this year relative to 2006, we are projecting a modest acceleration in Japan, boosted by a small fiscal stimulus and recent gains in external competitiveness. We also expect some acceleration in South America, supported by monetary easing in Brazil. The US is expected to continue to outpace the EU over our forecast horizon, partly due to more favourable demographic prospects. Strong population growth will also support Canada for the next decade, while the weaker medium-term prospects for Japan partly reflect anticipated declines in the population of working age. Loss of trade share will restrain growth in Canada and the Euro Area over the next 5 years, while the Euro Area will be further hampered by productivity developments, as it is expected to recover only gradually from a decade of weak productivity growth relative to the other major economies. This will restrain real wage growth and consumption over much of our forecast horizon.

After a surge of 2.9 per cent in the first quarter of 2006, world trade growth decelerated over the course of last year, although the estimated annual rise of 9.2 per cent is well above the historical average since 1970 of 6.3 per cent per annum. US import demand was weak in the final quarter of 2006, and this points to a more moderate outlook for global trade in 2007. We expect it to rise by 6 3/4 per cent this year and 6 1/2 per cent in 2008. Some caution should be used in interpreting global and especially EU trade figures in 2006, as these are distorted by a sharp increase in Missing Trader Intra-Community (MTIC) fraud in the UK, which added about 10 per cent to UK exports in the first 3 quarters of the year. MTIC fraud may distort net trade figures in the EU, as they are captured in export figures in the balance of payment statistics when they leave the country, but not in import statistics when they enter the country. The UK Office for National Statistics makes a correction for this omission on the import side, but, as none of the other EU statistical offices do the same, net EU trade may be overstated.

Table 1 shows our projections for GDP growth and inflation in the major economies to 2013. The outlook for global inflation over the next few years has dampened in recent months, largely due to developments in energy prices. The oil price has dropped steadily since the peak of nearly $79 per barrel reached in August 2006 at the height of the Israel-Lebanon conflict. To stem the decline in prices, OPEC cut production ceilings by 1.2 million barrels per day (about 4.3 per cent) in November. While this had a temporary stabilising impact, oil...

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