Gloom-burdened analysts may be right, but world economies grew in 2004, writes Chris Johns

Anyone expecting an economic slowdown for 2005 is having to think again. At the very least, the run of data through the last quarter of this year reveal a world economy in surprisingly good shape - surprising, that is, for those who continuously fret about US financial "imbalances" and Europe's structural growth problems.

Many of the forecasts and commentaries about the outlook for next year read almost exactly as they did 12 months ago.

US investment bank Morgan Stanley captured the mood perfectly with a recent look-ahead piece entitled How to Fix the World. The view that the global economy is broken has to square with the fact that world growth in 2004 was the highest in nearly three decades.

As always, perhaps, there is plenty to worry about. The dollar, Iraq and oil prices are three of the usual suspects but the list is a long one.

Economic pessimists point to a growing US balance of payments deficit as the main reason to expect a slowdown. That deficit reflects a consumer that has been on a borrowing binge for longer than anyone can remember, and a government deficit driven deep into the red by the Bush tax cuts.

With a saving rate as close to zero as makes no difference, US consumers must, it is argued, embark on a long road back to financial health, and this will inevitably lead to weak or non-existent consumption growth.

While nobody believes that George Bush will tackle his fiscal deficit - some doubt if he even knows he has one - it has to be acknowledged that there is no more room to give the economy a boost from lower taxes or higher spending.

The problems facing the US find an echo elsewhere in economies as far a field as Britain and Australia.

Optimists will point to gently deflating housing markets in those countries as evidence that necessary adjustment can take place without blowing up the wider economy.

But the British economy still has its own mini twin-deficit problem to cope with, plus the uncertainties (which, to be fair, probably aren't that great) of a general election.

Soon after that election, we can expect action to take care of a much-denied (by Gordon Brown at least) fiscal problem: British taxes will rise.

To complete this gloomy picture, key central banks have begun raising interest rates.

In the US, the Federal Reserve is slowly tightening the monetary screws with a well-trailed rise in interest rates of a quarter point every six weeks or so. This process will continue well into 2005, and is likely to take the steam out of the housing market.

Readers of the economic tealeaves say that all of this is already having an effect, with bond markets and other leading indicators pointing to an economic slowdown.

The problem for this elegantly argued prognosis is that it has had precious little support from that data - so far at least. The most that can be said about consumption growth is that it has edged down a notch. Some of the running is being taken up by capital investment, a phenomenon not exclusive to the US.

Even in those perennial laggards Germany and Japan, there is evidence that the investment cycle has begun to turn upwards. Looking back at 2004, we can see that growth slipped during the middle of the year but has regained considerable momentum as we head into 2005.

But the gloom merchants do have logic on their side.

The imbalances present in the global economy - which include a house price bubble in much of the English-speaking world - are not sustainable. What we don't know is the timing and likely path of adjustment. A quick restoration of normality will almost certainly involve a US recession: the current account deficit can be cut via a sharp fall in consumption.

The catalyst for such an event, however, is difficult to discern.

A gradual and relatively painless path back to sustainable growth will involve serious policy changes almost everywhere.

Asia, in particular, and Europe have to consume more, America must consume less.

Such dramatic swings in the pattern of global growth rarely happen spontaneously: policies have to be enacted to bring them about.

Europe's fatal attraction to low growth and high unemployment has to end: the list of policy options is as long as it is tediously familiar.

Europe's policy-makers know what to do, but are clueless - or perhaps spineless - when it comes to implementation. Agenda 2010 has the aim of making Europe as competitive as the US within the decade, but has become a standing joke.

Asia has an easier job: let currencies rise and implement policies to discourage excessive levels of saving - always a much more politically palatable task than the reverse.

This is why it is so easy to identify the problem, but tough to see the solution: unprecedented policy dilemmas are being presented to politicians who are naturally inclined towards parochialism and short-termism.

Globalisation has proceeded at a pace that has astonished even its dwindling band of supporters, and has thrown up new policy problems that many governments seem unwilling to recognise, let alone tackle.

The traditional problems at this point of the cycle usually involve inflation: that we haven't mentioned this at all is testament to how things have changed. That is but one aspect of the transformations wrought by globalisation.

Without concerted action on the global stage, the gloom merchants will eventually be proved correct. Things that are unsustainable generally come to an end. With robust growth continuing, the denouement is hard to identify.

We might even end up talking about the same issues this time next year, after another period of gravity-defying economic expansion. The ball is in the court of the world's policy-makers; that's why so many of us are getting worried.

Chris Johns is an investment strategist at Collins Stewart. All opinions are personal.