World Economic Outlook
Slow
Global Economic
Recovery Ahead
Global economic growth should continue its recovery in 2003, but less strongly than projected earlier this year, Kenneth Rogoff, the IMF's Economic Counsellor and Director of its Research Department, "Overall, we are cautiously optimistic about a global recovery, with the emphasis on caution," said Rogoff.
The
IMF projects 2002 global growth of 2.8 percent identical to its
April projections with an unexpectedly strong first quarter in
some key countries offset by a more recent deterioration in performance.
For 2003, the projection has been lowered by 3/10 of 1 percent
to 3.7 percent. The decline in the forecast reflects a further
sell-off in global equity markets, a decline in investor risk
appetite, softer-than-expected indicators of economic activity
in the past few months, further turmoil in parts of Latin America,
and heightened geopolitical uncertainty.
Putting the numbers
in perspective, Rogoff noted that 3.7 percent was far above the
2.2 percent global growth reached in 2001, thanks to the still
substantial monetary stimulus in the pipeline and a continuing
inventory rebound. Moreover, the evidence still supports the
view that the productivity boom resulting from the tech revolution
was real despite the slow recovery.
What is in store for
world trade? World trade volume was flat in 2001, and its growth
in 2002 is projected at only 2.1 percent, representing a setback
in the pace of global economic integration. But prospects are
brighter for 2003, with projected trade growth returning to a
more normal rate of 6.1 percent.
Inflation: Modern-Era Low
As
for inflation, the World Economic Outlook projects a modern-era
low of 1.4 percent in 2002 for the industrial countries and 1.7
percent in 2003. Taking into account various technical factors,
Rogoff said, "this is virtually the moral equivalent of
zero inflation." But paraphrasing the U.S. novelist Mark
Twain, he observed that nevertheless "rumors of the death
of inflation are greatly exaggerated, and the world's central
banks need to remain vigilant to the possibility of a steady,
slow increase in inflation over the coming years." In the
developing countries, inflation is projected at 5.6 percent in
2002 and 6 percent in 2003, again relatively low by the standards
of recent decades.
Turning to prospects
for the various regions, U.S. growth is projected at 2.2 percent
in 2002 and 2.6 percent in 2003, the latter being at the low
end of market expectations. These projections, Rogoff said, reflect
negative consumer sentiment, the sharp drop in equity prices,
uncertainty over the war in the Middle East, and still-weak evidence
of an eventual recovery in business fixed investment.
Europe To Lag U.S.
For the euro area, the forecast is for growth of 0.9 percent in 2002 and 2.3 percent in 2003. The main immediate concern in Europe is that domestic demand is too weak to fuel recovery. Europe has enormous potential for growth: it is only since 1995 that the United States has enjoyed higher productivity growth than Europe. But the World Economic Outlook emphasizes that until Europe reinvigorates its inflexible labor markets and addresses the consequences of its rapidly aging population, its growth rate will likely continue to lag that of the United States.
Japan: Slowest Growing Economy
Japan is now the slowest-growing major economy, with growth projected at 0.5 percent for 2002 and +1.1 percent for 2003. Japan appears to be emerging from its third recession in a decade, but there is no guarantee against another similarly bad decade without a determined effort to implement profound bank and corporate restructuring and to take decisive steps to end a period of deflation unprecedented among industrial countries since World War II.
Growth
Recovery
In Developing Countries
Growth
in developing countries overall is expected to recover to 4.2
percent in 2002 and to 5.2 percent next year. These projections
are, of course, conditional on continuing recovery in the industrial
countries. As for Latin America, financial markets have been
rocked by political developments and renewed concerns about longstanding
macroeconomic vulnerabilities. The persisting economic difficulties
in most countries in the region, and their continuing vulnerability
to external financial crisis, underscores that there is no elixir
to easily restore sustained high growth. At the same time, some
basic lessons cannot be ignored. Developing sound institutions
helps economic performance. Weak institutions dampen it. And
openness to trade is important for long-term growth.
Financial integration
is also important, not least to support trade, but there are
nuances to this piece of advice, Rogoff warned. Foreign direct
investment and portfolio flows are clearly beneficial for growth.
But debt-creating capital inflows, particularly those of a short-term
nature, can increase an economy's vulnerability to financial
crisis. Experience over the past decade with surges and sudden
stops in short-term capital flows suggests that a rethink of
what constitutes prudent debt levels may be in order.
Iraq War
Could Spike
Oil Prices By $15
On the minds of the journalists was the possible impact of a war against Iraq. Rogoff explained that the IMF's projections were subject to a number of downside risks. The possibility of conflagration in the Middle East is certainly one of those risks, he said, as is terrorism. However, it is difficult for forecasters to evaluate the economic impact of a potential war. One likely effect is a spike in oil prices, and the report shows that a $15 rise in oil prices, if sustained for a year, would lead to a 1 percent fall in global output, without taking into account the effects on consumer and business confidence. The IMF sees a great deal of uncertainty more broadly in the global outlook at this time, including on when business fixed investment will pick up. Equity prices have dropped and heightened risk aversion abounds. Uncertainty over conflagration interacts with these risks, he said, and potentially magnifies them. Clearly, world peace would be a very good thing for the world economy.
