The economic recovery from the slowdown of 1997–98 has proved to be much stronger than anticipated, and global growth is now estimated at 3.3 percent in 1999, according to the IMF’s latest World Economic Outlook. This new estimate represents a sharp upward revision from the projection of 2.2 percent made in December 1998. In addition, the world growth projection for 2000 has also been raised in the latest projections, to about 4¼ percent.
(annual percent change unless otherwise noted1)
The world economy has continued to strengthen following the relatively mild slowdown in the wake of the emerging market crisis.
1 Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of purchasing-power-parity weights unless otherwise indicated.
GDP weighted average of 10-year (or nearest maturity) government bond yields minus inflation rates for the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. Excluding Italy prior to 1972.
Data: IMF, World Economic Outlook, April 2000
Explaining the stronger growth forecasts, Michael Mussa, the IMF’s Economic Counsellor and Director of the Research Department, told an April 12 press conference that the strong rebound “really testifies to the policy adjustments that were made in the major industrial countries to ease monetary policy and to the strong stabilization and reform efforts in a number of emerging market countries around the world.”
Elements underlying growth
Mussa said that all areas of the world economy were contributing to the recovery and strong growth prospects. He explained how each region had performed:
• Performance in North America has been particularly strong, with the U.S. economy anticipated to turn in growth in the 5–6 percent range in the first quarter of 2000. Canada has also been doing well, and Mexico’s economy accelerated at the end of 1999.
• In Latin America, the recession in Brazil turned out to be shorter and shallower than had been anticipated. Other economies, especially Argentina, began to recover in the latter part of 1999.
• There have also been remarkable turnarounds in Asia, with Korea recording growth close to 11 percent, and other economies also showing recoveries. Among the largest economies, China and India are expected to continue to perform strongly, with growth in 2000 projected at 7 percent and 6 percent, respectively.
• Africa has shown stronger growth, particularly in Nigeria and South Africa, the two largest economies.
• A strengthening of growth was also evident in Europe. Growth was projected to be relatively strong in Hungary and Poland, and to pick up in the Czech Republic. Russia had also turned to significantly positive growth, which was expected to continue at least through 2000.
Areas of concern
At the same time, the World Economic Outlook highlights a main concern stemming from “a series of economic imbalances that have been building for several years.” According to the report, these include
• “the lopsided pattern of growth among the principal currency areas and the resulting increase in external imbalances, with the U.S. current account in record deficit and persistently large surpluses in Japan and, to a lesser extent, in the euro area;
• “the seemingly significant misalignments of several key currencies relative to what would be consistent with medium-term fundamentals, notably the strength of the dollar relative to the euro; and
• “the very high stock market valuations around the world.Experience has shown that such asset price inflation can be particularly destabilizing, because it may encourage households and businesses to overconsume and overinvest, and because of the danger that the financial system may become vulnerable to an eventual downward correction in asset prices.”
In discussing the continued expansion of the U.S. economy, the World Economic Outlook notes that, to date, the discrepancy between the growth of demand and supply has been reflected in a sharp widening of the external deficit rather than in inflationary pressures. The report also describes the significant rise in private borrowing (as a ratio of GDP) since the early 1990s. It goes on to note that “the process by which this widening of internal and external imbalances will ultimately be reversed is one of the major uncertainties facing the world economy. Every effort needs to be made to ensure that this occurs in an orderly manner (the so-called soft landing) rather than in an abrupt and discordant one (a ‘hard landing’).” The report recommends the U.S. Federal Reserve should move “progressively but prudently to a tighter monetary stance.”
Regarding the Japanese economy, Mussa said at the press conference that “we think the Japanese economy is in a recovery mode and has been so since last year. But that recovery has been particularly weak in terms of private demand, with consumption spending clearly weakening in the second half of last year. Business investment spending, though, has turned around, and I think the Japanese economy is on the path to recovery.”
Among the three largest economies of the euro area, the World Economic Outlook observes, “growth remains quite strong in France, and recovery is now under way in Italy and Germany.” At the same time, the report adds, “the momentum of activity seen in the larger economies continues to differ markedly from the much more rapid expansion in the smaller euro area countries,” where growth in some economies has been associated with rapid increases in asset prices, raising questions about whether current price levels are sustainable. In the case of the United Kingdom, the report said that further upward interest rate adjustments may be needed to contain inflationary pressures and cautioned that it is important for fiscal policy not to add to these pressures.
Flemming Larsen, Deputy Director of the Research Department, told the press conference that the World Economic Outlook also included coverage of three special issues.
Asset prices and the business cycle. The report addresses the question of what drives asset prices, the channels through which asset prices affect aggregate demand and activity, and the situations in which runups or falls in asset prices are so worrisome that policymakers need to respond.
Plight of the poorest countries. The report analyzes the reasons for the growing gap between the poorest and the richest countries. The persistence of this gap “is arguably one of the greatest economic failures of the twentieth century,” Larsen said. He explained that this chapter discusses the need for substantial reductions in debt burdens. It also addresses the need to raise economic growth—this being the most critical requirement to reduce poverty. For the advanced countries, the chapter emphasizes the importance of both reversing the downward trend in official development aid and reforming those trade policies that disadvantage the poorest countries. “More generally,” Larsen said, “integrating the poorest countries into the global economy clearly is a critical part of the solution. The current backlash against globalization on the argument that it hurts the poor is inconsistent with the experience of the successful emerging market countries in southeast Asia.”
Lessons from the economic achievements of the twentieth century. This chapter describes trends in global growth and income distributions, the impact of technological change, developments in the international monetary system, the changing role of the public sector, and some of the remaining challenges facing the international economy.
Addressing the issue of poverty, Mussa said that “the principal responsibility must rest with the countries, the societies themselves. The international community—and here I would include the international financial institutions as key players but not the only players—also plays an important, though necessarily secondary, role.”
Asked to explain the reasons for the downturn in official development assistance that is identified in the report, Mussa said that “to correct the downtrend in official development assistance, the action that is clearly required is action by the advanced industrial countries, and I think particularly the United States.”
Concerning the recent rise in world oil prices and its impact on projections, Tamim Bayoumi, Chief of the World Economic Studies Division in the Research Department, explained: “If you look at the futures market, the medium-term prediction of where oil prices would be stayed relatively stable compared to the spot price, and therefore, our prediction of falling oil prices is, in fact, based on these market predictions”
The texts of both the World Economic Outlook and Michael Mussa’s press conference are available on the IMF’s website (www.imf.org). The print edition of the World Economic Outlook will be available in May and may be obtained from IMF Publication Services.