World Economic Outlook:
Global economy appears to bne on path to recovery, but unclear prospects cloud forecast
World Economic Outlook:
Global economy appears to bne on path
to recovery, but unclear prospects cloud forecast
The
worst of the financial crisis that swept through Asia in 1997 and 1998 and
spread to Russia and Brazil in 1998 and the first part of 1999 may be over,
according to the latest World Economic Outlook, the IMF staff's biannual
survey of global prospects and policies. The global recovery could pick
up steam in 2000, but there are several important risks that could affect
the outcome. Michael Mussa, the IMF's Economic Counsellor and Director of
the Research Department, said that for 1999, world growth is estimated at
2.3 percent. For the year 2000, Mussa said, the World Economic Outlook
foresees a recovery of world output growth to 3.4 percent.
The
current weakening of world economic growth marks the fourth global economic
slowdown in the past quarter-century, according to the World Economic
Outlook. It began with the sharp declines in domestic demand and activity
in the four countries hardest hit by the Asian crisisIndonesia, Korea, Malaysia,
and Thailand. Japan's deepening recession in 1998 contributed to the difficulties
being experienced elsewhere in Asia. In most of the rest of the world, activity
was relatively well maintained during 1998, although signs of a slowdown
in industrial activity became increasingly apparent, and the growth of world
trade slowed sharply to 3-1/4 percent in 1998, the lowest since 1985. World
trade is projected to recover somewhat to 3.8 percent in 1999 and to 5.8
percent in 2000.
Improvements and Setbacks
Since
the end of 1998, some significant positive developments in the world economy
have been broadly balanced by some important setbacks. Among the setbacks,
the crisis in Brazil that led to the abandonment of its crawling-peg arrangement
in mid-January was another dramatic episode in the recurrent bouts of instability
that have marked global financial markets since 1997, according to the World
Economic Outlook. Although financial contagion from the Brazilian crisis
has been limited and the situation in Brazil itself has stabilized, the
crisis has imparted a new contractionary impulse to the global economy.
Financial sector fragilities in several emerging market economies, including
China, add to the risks of continued turbulence. Further, in Russia, the
delay in adopting coherent policies to promote stabilization and reform
has postponed improvements in the economy. The conflict in the Federal Republic
of Yugoslavia will have severe effects on neighboring countries. Japan's
economy remains weak. Also, the series of emerging market crises, as well
as the uneven pattern of growth among the United States, the euro area,
and Japan, have increased global trade imbalances.
On
the positive side, after the deep contractions in output in the Asian countries
affected by the crisis, activity has recently turned around in Korea and
appears to have bottomed out in Malaysia and Thailand. Investor sentiment
toward many emerging market economies has rallied, while onditions in mature
financial markets have also improved following the broad-based easing of
monetary conditions undertaken partly to address concerns about a credit
crunch in the wake of Russia's default last August. The introduction of
the euro has proceeded smoothly, and more generally, most of the advanced
economies of North America and Europe have proved resilient to the crises
in emerging markets. Particularly notable has been the continued strong
growth of the U.S. economy.
Forecasts for 1999 and 2000
The
forecast for 1999 is little changed from that of the interim World Economic
Outlook of December 1998, Mussa said. It reflects upward revisions in
the forecast for the United States, Canada, Australia, Korea, Thailand,
and Malaysia, offsetting weaker forecasts for Japan, Latin America, and
a number of European economies. The chances that this forecast could be
too high or too low are relatively even, Mussa said, marking a considerable
change from last December when the balance of risks was decidedly on the
downside. He emphasized that policy actionsboth in the industrial countries
where monetary policies have been eased significantly and in emerging market
countries where reform efforts have been strengthenedhave contributed to
this evening up of the risks.
Although
the forecast for 2000 is 1 percentage point stronger than last year and
there are good reasons to expect recovery, Mussa said the forces that will
sustain the recovery are not completely secure, and the balance of risks
that the IMF staff's projection will materialize remains on the downside.
There are growing indications that activity in the Asian crisis economies
is close to its trough, but, according to the World Economic Outlook,
that is unlikely to signal an early reversal of the global slowdown.
Indeed, in 1999, new negative forces are contributing to a second phase
of the slowdown in the global business cycleincluding the repercussions
and spillovers from the Russian crisis and the crisis in Brazil and spillovers
from the latter to the rest of Latin America. Some of the industrial countries
that have seen the most vigorous sustained expansions in recent yearssuch
as Norway and the United Kingdomhave recently experienced cyclical slowdowns;
growth in the U.S. economy is also expected to slow moderately in the period
ahead; and downward revisions to projections for much of western Europe
now point to near-term growth somewhat below potential.
The
IMF staff's baseline projection for 2000 assumes that, for emerging market
economies, financial market conditions will improve further, that the U.S.
economy will experience a soft landing, that growth in the euro area will
remain reasonably resilient in the face of an unfavorable external environment,
and that the Japanese recession will bottom out in 1999. However, as Mussa
noted in the press briefing, there is a distinct possibility of a less favorable
scenario developing:
There
is some question about how global growth can be restored to near potential,
given that domestic demand growth in the United States, which has been running
at an unsustainable pace for the past three yearsat about 4 percent of GDPwill
eventually need to slow down at some point over the next year or two, in
order to allow some narrowing of the U.S. current account. As the World
Economic Outlook notes, the slowdown could be more abrupt than assumed
if inflation picks up, the stock market undergoes a significant correction,
or the private sector begins to correct its large saving shortfall more
quickly than assumed.
The
World Economic Outlook forecasts a recovery in growth of about 3
percent for Europe, but, Mussa said, the basis for that recovery has yet
to become apparent. The recent easing of monetary policy by the European
Central Bank and the depreciation of the euro will have positive effects,
he observed, but it is too soon to predict the outcome.
In
Japan, Mussa noted, the economy appears to be bottoming out, and growth
well above the World Economic Outlook forecast of 0.3 percent is
certainly possible. But recovery of consumer confidence is essential to
drive the recovery of private demand, and continued policy support needs
to be provided until the private sector is clearly in recovery mode.
Most
of the crisis economies of Asia are clearly turning around, Mussa said,
but that turnaround needs to be sustained, both by policy action and by
recovery in the private sector.
In
China, strong stimulative policies have helped sustain growth in 1998 and
in the first part of 1999, but that level of support cannot continue indefinitely,
Mussa noted.
Much
of Latin America, particularly South America, is in recession, and recovery
should begin later this year, Mussa said. A strong rebound is certainly
feasible, and the same may be said for a number of developing countries
and transition economies. All of the developing and emerging market economies,
however, will need to rely on at least a moderately favorable growth environment
among the major industrial countries if they are to achieve the growth forecasts
in the present World Economic Outlook.
Another
key uncertainty in assessing the global outlook, according to the World
Economic Outlook, is the potential for further financial market turbulence
and contagion, especially in the light of the apparently heightened perception
of, and increased aversion to, risk in financial markets.
Other
risks that could affect the forecast, according to the World Economic
Outlook, stem from the uneven pattern of growth among the three large
currency areas since the beginning of the decade, which has resulted in
a marked widening of external current account imbalances. These imbalances,
which have been exacerbated by the emerging market rises, carry significant
risks for the world economy through a potential rise in protectionist pressures
or excessive and potentially destabilizing movements in exchange rates among
the major currencies.
The
fiscal and GDP impact of the Kosovo crisis on the United States and the
euro area will be small and, at the global level, will not significantly
influence the performance of the economy, said Mussa.
Editor's Note: Copies of the World Economic Outlook are available
for $36 from IMF Publication Services, Box XS900, IMF, Washington, D.C.
20431, (202) 623-7430, fax (202) 623-7201, e-mail publications@imf.org.
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