WASHINGTON, 7 April 2005 — The world economy grew 3.8 percent in 2004, the strongest rate in four years, powered by a record 6.6 percent expansion in developing economies, the World Bank said in a report released yesterday.

The World Bank anticipated that global growth would recede to 3.1 percent in 2005 and 2006, the result of increasing US interest rates, fiscal tightening and the 25 percent appreciation of the euro. Growth projections for developing countries over 2005 and 2006 were 5.7 percent and 5.2 percent respectively.

Global growth in 2003 was 2.5 percent.

The biggest cloud on the horizon was the soaring $666 billion current accounts deficit in the United States, said the World Bank’s annual Global Development Finance 2005 report. “Global growth momentum has peaked, and developing country gains are vulnerable to risks associated with adjustments to ballooning global imbalances — especially the ... US current account deficit,” the report said.

The rapid expansion was concentrated in China, India and Russia. Those three countries plus Brazil have been receiving the bulk of the world’s net foreign direct investments, $165.5 billion, up by $13.7 billion over 2004. The same four countries are also responsible for a large chunk of private capital outflows. “This recovery of financial flows is a welcome sign of renewed market interest in developing countries,” said Francois Bourguignon, the bank’s chief economist.

Foreign reserves held by developing countries increased by $378 billion in 2004, to an all-time high of $1.6 trillion. China alone holds $610 billion, India has $125 billion and the Russian Federation has $114 billion.

The accumulations are a “sensible” strategy for most countries, but the World Bank pointed out risks “arising from the possible impact of changing exchange rates”.

The US dollar has plummeted against the euro over the last year, and officials in South Korea and Japan have hinted that they may diversify their foreign reserve holdings. Their remarks were taken to mean that demand for the dollar could fall further.

While the report did not mention the dollar specifically in that connection, the bank said countries holding high levels of reserves “may need to re-evaluate the desirability and sustainability of continued reserve accumulation”.