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Abstract
Expansions have been under way for some time in the United States, the United Kingdom, Canada, and Australia, and there are firm signs of improving economic growth in most other industrial countries. Inflation is now at the lowest rates in decades in many countries (see Chart 7 in Chapter II). The medium-term prospect for the industrial countries is for growth to proceed at a moderate pace sufficient to diminish margins of slack and to bring, over time, significant reductions in cyclical unemployment and in the cyclical components of large budget deficits. There appears to be no immediate danger of—and under proper policies, no medium-term reason to expect—a general upsurge of inflation. As economic expansion proceeds, however, situations of excess demand may again emerge. Moreover, efforts at fiscal consolidation may flag because the cyclical recovery will give the appearance of an improvement in budget deficits well beyond what actually has been achieved in terms of underlying structural balances. The result, as in the late 1980s in many countries, could be a resurgence of inflationary pressures and the persistence of high real interest rates owing to fiscal crowding out. This risk would be aggravated to the extent that recent increases in unemployment might become entrenched, as has occurred in the past in Europe.
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