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The global economy recorded a fourth consecutive year of strong growth in 2006 despite the drag from crude oil prices, a buildup in global electronics inventories and adjustment in the US housing market.
The US economy remained resilient amidst the sharp correction in the housing market in the second half of last year. The strong job market and rise in corporate profits continued to underpin domestic demand. However, inflationary pressures increased in the first half of the year and the Federal Reserve responded by raising the Federal Funds Rate from 4.25% at the start of the year to 5.25% in June 2006. Since then, it has kept monetary policy on hold.
In the Eurozone, the strong recovery in Germany lifted economic growth to a five-year high in 2006. Following structural reforms in some of the key economies, businesses have become more competitive and corporate profits have strengthened. Increased hiring by firms has brought the Eurozone’s unemployment rate to a record low in April this year, which boosted consumer confidence.
Japan’s current phase of economic expansion is the longest in the past decade. Led by corporate investment, the robust growth has pushed the unemployment rate to the lowest level since March 1998. This enabled the Bank of Japan (BOJ) to end its five-year quantitative easing regime in March 2006. The BOJ has raised interest rates twice to 0.5% since ending its zero interest rate policy in July 2006.
The rest of Asia performed well last year on the back of a favourable global environment. China and India continued to power ahead and provided the catalyst for sustained growth in
intra-regional trade. (See Box 1 on Economic and Financial Integration in East Asia). Alongside the strong export performance, domestic demand also picked up in some of the regional economies.
Into the first quarter of 2007, growth moderated across the G3 and some of the Asian economies, in part due to the ongoing adjustment in the US housing market and global electronics industry. Against this, China experienced faster growth. Overall, the global economy has remained robust and is poised to expand at a fairly firm pace for the whole of 2007.
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