The global economy grew strongly in the first half of 2007, although turbulence in financial markets has clouded prospects. While the 2007 forecast has been little affected, the baseline projection for 2008 global growth has been reduced by almost 1/2 percentage point relative to the July 2007 World Economic Outlook Update. This would still leave global growth at a solid 4¾ percent, supported by generally sound fundamentals and strong momentum in emerging market economies. Risks to the outlook, however, are firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown. Thus, the immediate focus of policymakers is to restore more normal financial market conditions and safeguard the expansion. Additional risks to the outlook include potential inflation pressures, volatile oil markets, and the impact on emerging markets of strong foreign exchange inflows. At the same time, longer-term issues such as population aging, increasing resistance to globalization, and global warming are a source of concern.
World growth in recent years has been much more rapid than at any time since the oil price surges of the 1970s. This growth is being shared across countries to an unprecedented degree. Moreover, output volatility in most countries and regions has significantly declined. This chapter analyzes these changes in business cycle characteristics and finds that the increasing stability and the associated increase in the durability of expansions largely reflect sources that are likely to prove persistent. In particular, improvements in the conduct of monetary and fiscal policy, as well as in broader institutional quality, have all reduced output volatility. The prospects for future stability should, however, not be taken for granted. Low average volatility does not mean that the business cycle is dead. The abrupt end to the period of strong and sustained growth in the 1960s and early 1970s provides a useful cautionary lesson about what can happen if policies do not adjust to tackle emerging risks in a timely manner.
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