Abstract

The following remarks by the Acting Chair were made at the conclusion of the Executive Board’s discussion of the World Economic Outlook on September 3, 2004.

Annex Summing up by the Acting Chair

The following remarks by the Acting Chair were made at the conclusion of the Executive Board’s discussion of the World Economic Outlook on September 3, 2004.

Executive Directors noted that the global recovery remains solid, with economic growth in 2004 projected to reach its highest rate in nearly 30 years. The expansion is underpinned by continued accommodative macroeconomic policies, rising corporate profitability, and wealth effects from rising equity and house prices. It has become increasingly broad-based geographically, although some regions continue to grow more vigorously than others. Global growth remains driven by the United States, with strong support from Asia, particularly China and Japan. Activity in Latin America and some other emerging markets has also picked up strongly, while the outlook for Africa has improved. There is growing economic momentum in the euro area, although the strength of the upturn varies across countries and in some cases is heavily dependent on external demand.

While welcoming these developments, Directors noted that risks to the expansion have increased in recent months. First, oil prices rose sharply through mid-August, driven by strong global demand and, increasingly, supply-side concerns. While prices have since fallen back somewhat, they are still significantly higher than in 2003; and with spare capacity near historical lows, the oil market remains highly vulnerable to shocks and speculative pressures. Against this backdrop, Directors urged greater cooperation between consumers and producers toward a more stable global oil market, with some Directors emphasizing the importance of measures to promote more efficient use of oil and other nonrenewable resources. Second, and partly related, second-quarter growth slowed in some major countries—including the United States and Japan. Directors noted the risk that this slowdown could persist, especially if employment growth in the United States remains relatively modest. Overall, while Directors generally expected a continued solid expansion of the world economy, they considered that the balance of risks has shifted to the downside, with further oil price volatility and geopolitical risks becoming the central short-term concerns.

Directors noted that inflationary risks remain generally moderate. Nevertheless, after falling to unusually low levels in mid-2003, inflation has turned up around the world, reflecting a combination of strong growth and higher commodity prices. Directors cautioned that, going forward, inflationary pressures could prove stronger than expected, necessitating a sharper-than-expected rise in interest rates. While acknowledging that monetary policy in many countries remains appropriately accommodative, Directors underscored that the key short-term policy challenge will be to continue to manage the transition toward higher interest rates to ensure that nascent inflationary pressures are contained, while facilitating—through continued good communication of the stance of monetary policy—sustained economic recovery and orderly adjustment in financial markets. In this connection, Directors viewed further sustained increases in oil prices as a complicating factor. While first-round oil price effects should be accommodated, central banks will need to ensure that second-round effects are well contained.

Directors called on policymakers to take advantage of the current cyclical expansion to address three key medium-term vulnerabilities and concerns.

  • First, global imbalances—which remain an important medium-term risk to the economic outlook—need to be tackled. Directors reiterated that eliminating these will require medium-term fiscal consolidation in the United States to increase domestic saving, structural reforms to boost growth in Europe, Japan, and elsewhere, and steps toward greater exchange rate flexibility in Asia, as appropriate. In all three areas, much remains to be done; it will be important to make strong progress on each of them.

  • Second, the pace of structural reforms needs to be quickened to increase economic flexibility and resilience, so that countries are well positioned to take full advantage of the opportunities from globalization and the information technology revolution, while strengthening their resistance to future shocks. Noting the key role of open markets in promoting competitiveness and efficiency, Directors looked forward to far-reaching trade liberalization under the Doha Round, building on the welcome progress in Geneva in July.

  • Third, medium-term fiscal positions need to be strengthened in both industrial and developing countries. This will require a combination of fiscal consolidation, while allowing automatic stabilizers to work; structural measures to improve debt sustainability, including tax reform and stronger public expenditure frameworks; and reforms of pension and health care systems.

Industrial Countries

Directors welcomed the strong expansion in the United States, which has provided important support to global growth. Although business investment remains strong, Directors cautioned that the slowdown in consumption in the second quarter may be a source of concern going forward, especially since support from past macro-economic stimulus and mortgage refinancing will decline in coming quarters. Nevertheless, in the context of the strong expansion expected for 2004, Directors agreed that a measured pace of tightening of monetary policy—calibrated according to the strength of the expansion and the extent of underlying inflationary pressures— is likely to be appropriate. Regarding fiscal policy, most Directors considered the pace of deficit reduction targeted for fiscal years 2005 and 2006 as appropriate, but many encouraged the authorities to capitalize on the better-than-expected budget outcome for fiscal year 2004 by further strengthening the near-term deficit reduction objective. For the medium term, most Directors suggested that the objective of halving the budget deficit over five years is not sufficiently ambitious. Directors generally reiterated the long-standing call for the establishment of a clear long-term fiscal goal embedded within the context of a credible medium-term fiscal framework.

Directors were encouraged that the euro area expansion has finally gained momentum, although the upturn remains moderate and heavily dependent on external demand, with substantial differences across countries. Looking forward, rising disposable incomes and progress in corporate balance sheet restructuring should help the euro area boost private consumption and investment, and contribute to a more balanced area-wide recovery. With underlying inflationary pressures still relatively moderate, Directors agreed that monetary policy should remain accommodative until a self-sustaining upturn in domestic demand is in place. Although recently enacted structural reforms have strengthened the prospects for medium-term growth, further reforms will be needed to provide critically needed impetus to employment creation and domestic demand. Directors stressed that the recovery provides a renewed opportunity for progress, focused particularly on the key issue of raising labor utilization. In this connection, some Directors recalled that, based on past experience, renewed initiatives at the European Union level for product market deregulation can also play a useful role, as they strengthen incentives for reforms, especially in labor markets.

Directors were encouraged by the finding of the staff’s analysis of fiscal behavior under the EMU that fiscal policies in the euro area have become less procyclical over the past decade. However, they also highlighted the persisting tendency toward fiscal expansion in good times, which they saw as an important reason why some member states are currently breaching the Stability and Growth Pact (SGP) deficit limits. Accordingly, Directors urged euro area governments to take full advantage of the current expansion to strengthen fiscal positions. Many Directors underlined that reducing the procycli-cal bias of fiscal policy should be an important objective of ongoing reflection on the improvements needed in the design and effectiveness of SGP fiscal rules.

Directors welcomed the strong expansion in Japan over the last year. They noted that this was accompanied by a gradual easing of deflationary pressures, and continued progress in addressing corporate and financial sector vulnerabilities— although a substantial reform agenda remains to be completed in both areas. Despite the slowdown in GDP growth in the second quarter, most high-frequency indicators remain supportive of a continued solid expansion, with external sector developments—including with respect to oil prices and the exchange rate, as well as labor market conditions—remaining keys to the outlook. Directors underscored that to ensure an end to deflation, the current highly accommodative monetary stance should be maintained until inflation is firmly positive. Most Directors emphasized that, given Japan’s difficult fiscal position and the favorable economic environment, it is now opportune to start the process of fiscal consolidation, including by achieving savings in fiscal year 2004 relative to the budget. Some Directors noted that stepped-up structural reforms should also improve Japan’s fiscal position by increasing potential output growth—with the priorities being public enterprise reforms, strengthened competition policy, and enhanced labor market flexibility.

Directors welcomed the staff’s analysis of the global house price boom and the impact that rising interest rates in industrial countries might have on housing markets. They noted the staff’s analysis, which, reflecting linkages in economic activity and interest rates, shows a remarkable degree of synchronization of house prices across industrial countries—although the data limitations need to be recognized. Given the importance of house prices for private consumption, through wealth and credit channels, many Directors suggested that policymakers should monitor developments in the housing market closely, and they noted that a tightening of monetary policy during the transition to a more neutral policy stance could trigger a slowing or reversal of house price growth. Some Directors also underscored the need to further develop the mortgage market infrastructure and improve housing statistics.

Emerging Markets and Developing Countries

Directors welcomed the continued strength of the expansion in emerging Asia, reflecting the combined influence of the global upturn, especially in the electronics sector; the generally supportive macroeconomic policies, including highly competitive exchange rates; and the progressively stronger domestic demand growth. Looking forward, regional growth is expected to slow somewhat, but to remain solid, with much depending on developments in China, where— despite signs of slowing growth—a soft landing is not yet guaranteed. Other potential risks include the region’s relatively greater exposure to oil price volatility and to higher global real interest rates, especially on countries reliant on external financing.

Given the prospects for solid growth and the still generally accommodative policies in emerging Asia, Directors agreed that monetary policies may need to be tightened, albeit by varying degrees, in most countries. Most Directors noted that, given continued current account and balance of payments surpluses, monetary tightening would be facilitated by greater exchange rate flexibility. In this connection, a number of Directors called on the authorities to use the current favorable conditions to initiate the transition to more flexible exchange rates. Directors stressed the importance of sound underlying macroeconomic policies and structural reforms in ensuring a smooth transition to more flexible exchange rate regimes. Directors were encouraged by the staff’s finding that voluntary transitions to more flexible exchange rate regimes are generally not associated with an increase in macroeconomic instability. This probably reflects the strengthening of monetary and financial policy frameworks through greater central bank independence, the adoption of inflation targeting, the improvements in bank supervision, and the development of securities markets that frequently accompanied the transitions. Directors stressed the importance of proper timing and sequencing of reforms in these areas, tailored to individual country circumstances, in order to prepare the transition. Several Directors also pointed out that sound policies are essential for the success of any exchange rate regime.

Directors were encouraged by the strong rebound in economic activity in Latin America, supported by easier monetary conditions in most countries, improved confidence, rising commodity prices, and the global expansion. They noted that while sovereign borrowers have already largely met their funding requirements for 2004, external financing requirements remain high, and constitute an important vulnerability going forward. Directors emphasized that cutting high public debt ratios will be key to reducing vulnerabilities, and urged countries to press ahead with fiscal reforms. To boost medium-term growth, Directors pointed to the importance of strengthening the rule of law and investor rights, fostering financial sector development, further liberalizing trade, and promoting labor market flexibility. They noted that the success of these reforms will also require actions to address income inequality and reduce poverty.

Directors welcomed the continued strong growth momentum in emerging Europe the commonwealth of Independent States (CIS),while cautioning that policymakers in some of these countries need to guard against overheating. They underscored the need for fiscal consolidation, especially in light of substantial expenditure pressures and—in much of emerging Europe and the CIS-7—large external deficits. They also called for tighter monetary policies in the CIS, including through upward exchange rate flexibility in countries with large external surpluses; and for strengthening bank supervision in both regions to curb the prudential risks arising from rapid private sector credit growth. In addition, countries will need to persist with key structural reforms to further improve investment climates and fully develop the institutions and structures for market-based economies. In the Middle East, Directors noted the fading impetus to growth from higher oil production and prices as production reaches capacity. At the same time, they noted that the region will benefit from an expected substantial pickup in non-oil growth stemming from the global expansion and progress with reforms, especially trade liberalization. Fiscal consolidation will remain a priority in most countries, as will the need to boost employment by improving the environment for sustained private secto—rled growth.

Directors were encouraged by the improved outlook for Africa. This has been underpinned by greater macroeconomic stability, higher export commodity prices, lower external debt burdens, somewhat better access to industrial country markets, and a variety of country-specific developments. Nevertheless, with most countries likely to fall significantly short of achieving the Millennium Development Goals, key challenges going forward will be to promote private investment and develop infrastructure, deepen institutional reforms, and reduce government involvement in the economy. Directors were encouraged that several countries have achieved more favorable governance levels. They called on the international community to support the region’s strengthened reform efforts—through increased and better-coordinated assistance, continued debt relief, and elimination of barriers to exports, particularly in agriculture.

Demographic Change

Directors welcomed the work undertaken by the staff on demographic change, which is becoming an increasingly urgent concern. To meet the demographic challenges from population aging, industrial countries should boost labor supply, saving, and productivity, which, given the size of prospective demographic changes, will require a combination of reforms to be politically acceptable. Particularly important will be the selection of reforms, especially with respect to pension and health care systems: they will need to be resilient to a wide range of possible future demographic changes. For developing countries, Directors agreed that the key policy priorities will be to increase the flexibility of labor and product markets, and to ensure that labor resources and savings are effectively utilized. It will be important in these countries to move early to lay the groundwork for eventual population aging, including by strengthening pension and health care systems. This will be particularly challenging where medium-term fiscal positions are already under strain. Directors agreed that a broad longer-term implication of the staff’s work on demographic change is that the effectiveness of actions to facilitate movements of goods, capital, and labor smoothly and efficiently across countries will significantly influence the pace, and pattern, of global adjustment to different rates of population aging. This promises to be a subject in which the international community—including the Fund—has a shared interest.

Statistical Appendix

The statistical appendix presents historical data, as well as projections. It comprises five sections: Assumptions, What’s New, Data and Conventions, Classification of Countries, and Statistical Tables.

The assumptions underlying the estimates and projections for 2004–05 and the mediumterm scenario for 2006–09 are summarized in the first section. The second section presents a brief description of changes to the database and statistical tables. The third section provides a general description of the data, and of the conventions used for calculating country group composites. The classification of countries in the various groups presented in the World Economic Outlook is summarized in the fourth section.

The last, and main, section comprises the statistical tables. Data in these tables have been compiled on the basis of information available through mid-September 2004. The figures for 2004 and beyond are shown with the same degree of precision as the historical figures solely for convenience; since they are projections, the same degree of accuracy is not to be inferred.

Assumptions

Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels during the period July 7– August 4, 2004. For 2004 and 2005, these assumptions imply average U.S. dollar/SDR conversion rates of 1.468 for 2004 and 1.461 for 2005, U.S. dollar/euro conversion rate of 1.22 and 1.21, and yen/U.S. dollar conversion rates of 109.7 and 109.8, respectively.

It is assumed that the price of oil will average $37.25 a barrel in 2004 and 2005.

Established policies of national authorities are assumed to be maintained. The more specific policy assumptions underlying the projections for selected advanced economies are described in Box A1.

With regard to interest rates, it is assumed that the London interbank offered rate (LIBOR) on six-month U.S. dollar deposits will average 1.6 percent in 2004 and 3.4 percent in 2005, that six-month euro deposits will average 2.2 percent in 2004 and 2.8 percent in 2005, and that six-month Japanese yen deposits will average 0.1 percent in 2004 and 0.3 percent in 2005.

With respect to introduction of the euro, on December 31, 1998, the Council of the European Union decided that, effective January 1, 1999, the irrevocably fixed conversion rates between the euro and currencies of the member states adopting the euro are as follows.

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See Box 5.4 in the October 1998 World Economic Outlook for details on how the conversion rates were established.

What’s New

  • The European Union added 10 new member nations on May 1, 2004, enlarging the group to a total of 25 countries. The new members are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, and Slovenia.

Economic Policy Assumptions Underlying the Projections for Selected Advanced Economies

The short-term fiscal policy assumptions used in the World Economic Outlook are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions and projected fiscal outturns. The medium-term fiscal projections incorporate policy measures that are judged likely to be implemented. In cases where the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged structural primary balance is assumed, unless otherwise indicated. Specific assumptions used in some of the advanced economies follow (see also Tables 12–14 in the Statistical Appendix for data on fiscal and structural balances).1

United States. The fiscal projections are based on the Administration’s mid-session review projections (July 30, 2004) adjusted to take into account: (1) differences between macroeconomic assumptions; (2) additional Alternative Minimum Tax (AMT) relief; and (3) higher defense spending in line with Congressional Budget Office projections and IMF staff assumptions. Most provisions of the 2001 and 2003 tax cuts are assumed to be made permanent.

Japan. The medium-term projections for social security revenue and expenditure assume implementation of the pension reform recently passed by the Diet. For the rest of the general government (excluding social security), expenditure and revenue are adjusted in line with the current government target of achieving primary balance by the early 2010s.

Germany. Fiscal projections for 2004–09 are based on the IMF staff’s macroeconomic assumptions and estimates of fiscal adjustment measures and structural reforms.

France. Projections for 2004 are based on the budget adjusted for the IMF staff’s growth projections and budget execution to date. For 2005–07, projections are based on the IMF staff’s macroeco-nomic assumptions and the intentions underlying the 2005–07 Stability Program Update, except for a higher growth of health care spending. For 2008–09, the IMF staff assumes unchanged tax policies and real expenditure growth at the average rate of 2005–07.

Italy. Fiscal projections for 2004 assume measures of about ½ percent of GDP committed to by the authorities in July. In 2005, the planned tax cuts are assumed to be fully matched by expenditure cuts. Beyond 2005, projections start with the assumption of a constant structural primary balance, and are then adjusted for the savings from the ongoing pension reform (impact starting from 2008).

United Kingdom. The fiscal projections are based on information provided in the 2004 Budget Report. Additionally, the projections incorporate the most recent statistical releases from the Office for National Statistics, including provisional budgetary outturns throughout 2004:Q1.

Canada. Projections are based on the 2004 budget, released on March 23, 2004. The federal government balance is the IMF staff’s estimate of the planning surplus (budgetary balance less contingency and economic reserves).

Australia. Fiscal projections through the fiscal year 2007/08 are based on the 2004 Budget published in May 2004. Subsequently, the IMF staff assumes no change in policies.

Austria. Fiscal projections for 2004 are based on the authorities’ most recent projections. Projections for 2005–07 are based on the Stability Program objectives, adjusted for IMF staff projections of yields of spending and tax measures in 2005–06. Projections for 2008 assume further improvements in fiscal balances based on expenditure measures, consistent with the authorities’ plan to balance the budget in 2008.

Belgium. Fiscal projections for 2004 are consistent with the budget and developments through midyear. Projections for subsequent years are based on the government’s tax reform plans, and historical expenditure trends, adjusted for IMF staff macroeconomic assumptions.

Denmark. Projections for 2004 are aligned with the authorities’ latest projections and budget, adjusted for the IMF staff’s macroeconomic projections. For 2005–09, projections are in line with the authorities’ medium-term framework—adjusted for the IMF staff’s macroeconomic projections—targeting an average budget surplus of 1.5–2.5 percent of GDP, supported by a ceiling on real public consumption growth.

Greece. Historical data and projections do not take into account revisions to the fiscal data announced in mid-September, which raised general government deficits and debt substantially. The projections assume (1) constant ratio of revenue to GDP; (2) EU transfers falling in the medium term; (3) continuation of the increase in social contributions until 2007; (4) continuation of recent trends for wage growth, social spending, and operational spending; (5) a gradual decline in investment spending from its peak level in 2003–04 owing to the 2004 Olympic games; and (6) a constant ratio to GDP for other spending.

Korea. For 2004, it is assumed that the fiscal outcome will be in line with the budget. In the medium term, fiscal policy is assumed consistent with achieving a balanced budget excluding social security funds.

Netherlands. Fiscal projections for 2004 and 2005 build on the latest government estimates and include the additional policy measures announced in the spring. Projections for subsequent years are based on the latest Stability Program, adjusted for the IMF staff’s macroeconomic assumptions.

Portugal. Fiscal projections for 2004 build on the preliminary figures for the 2003 deficit and the authorities’ 2004 targets (including the 2004 budget target for one-off measures), adjusted for the IMF staff’s macroeconomic projections for 2004. Projections for 2005 and beyond assume a constant structural primary balance.

Spain. Fiscal projections through 2007 are based on the national authorities’ updated stability program of January 2004, adjusted for the IMF staff’s macroeconomic projections. Projections also reflect the combined effect of the recently announced decision to pay the historical debt with Andalusia (0.3 percent of GDP) this year and additional spending associated with this transfer; a small deficit is also envisaged for regional governments (0.2 percent of GDP). In subsequent years, the fiscal projections assume no significant changes in policies.

Sweden. The fiscal projections are based on information provided in the 2004 Spring Budget Bill. Additionally, the projections incorporate the most recent statistical releases from Statistics Sweden, including provisional budgetary outturns throughout May 2004.

Switzerland. Projections for 2004 are based on federal budget and IMF staff projections for lower levels of government. Projections for 2005–07 are based on official financial plans (which incorporate measures to restore balance in the federal accounts) adjusted for the effects of recent referenda and for the IMF staff’s macroeconomic projections.

Monetary policy assumptions are based on the established policy framework in each country. In most cases, this implies a nonaccommodative stance over the business cycle: official interest rates will therefore increase when economic indicators suggest that prospective inflation will rise above its acceptable rate or range, and they will decrease when indicators suggest that prospective inflation will not exceed the acceptable rate or range, that prospective output growth is below its potential rate, and that the margin of slack in the economy is significant. On this basis, the London interbank offered rate (LIBOR) on six-month U.S. dollar deposits is assumed to average 1.6 percent in 2004 and 3.4 percent in 2005. The projected path for U.S. dollar short-term interest rates reflects the assumption implicit in prevailing forward rates that the U.S. Federal Reserve will continue to raise interest rates in 2004–05. The rate on six-month euro deposits is assumed to average 2.2 percent in 2004 and 2.8 percent in 2005. The interest rate on six-month Japanese yen deposits is assumed to average 0.1 percent in 2004 and 0.3 percent in 2005, with the current monetary policy framework being maintained. Changes in interest rate assumptions compared with the April 2004 World Economic Outlook are summarized in Table 1.1.

1 The output gap is actual less potential output, as a percent of potential output. Structural balances are expressed as a percent of potential output. The structural budget balance is the budgetary position that would be observed if the level of actual output coincided with potential output. Changes in the structural budget balance consequently include effects of temporary fiscal measures, the impact of fluctuations in interest rates and debt-service costs, and other noncyclical fluctuations in the budget balance. The computations of structural budget balances are based on IMF staff estimates of potential GDP and revenue and expenditure elasticities (see the October 1993 World Economic Outlook, Annex I). Net debt is defined as gross debt less financial assets of the general government, which include assets held by the social security insurance system. Estimates of the output gap and of the structural balance are subject to significant margins of uncertainty.

Data and Conventions

Data and projections for 175 countries form the statistical basis for the World Economic Outlook (the World Economic Outlook database). The data are maintained jointly by the IMF’s Research Department and area departments, with the latter regularly updating country projections based on consistent global assumptions.

Although national statistical agencies are the ultimate providers of historical data and definitions, international organizations are also involved in statistical issues, with the objective of harmonizing methodologies for the national compilation of statistics, including the analytical frameworks, concepts, definitions, classifications, and valuation procedures used in the production of economic statistics. The World Economic Outlook database reflects information from both national source agencies and international organizations.

The completion in 1993 of the comprehensive revision of the standardized System of National Accounts 1993 (SNA) and the IMF’s Balance of Payments Manual (BPM) represented important improvements in the standards of economic statistics and analysis.2 The IMF was actively involved in both projects, particularly the new Balance of Payments Manual, which reflects the IMF’s special interest in countries’ external positions. Key changes introduced with the new Manual were summarized in Box 13 of the May 1994 World Economic Outlook. The process of adapting country balance of payments data to the definitions of the new BPM began with the May 1995 World Economic Outlook. However, full concordance with the BPM is ultimately dependent on the provision by national statistical compilers of revised country data, and hence the World Economic Outlook estimates are still only partially adapted to the BPM.

The members of the European Union have adopted a harmonized system for the compilation of the national accounts, referred to as ESA 1995. All national accounts data from 1995 onward are presented on the basis of the new system. Revision by national authorities of data prior to 1995 to conform to the new system has progressed, but has in some cases not been completed. In such cases, historical World Economic Outlook data have been carefully adjusted to avoid breaks in the series. Users of EU national accounts data prior to 1995 should nevertheless exercise caution until such time as the revision of historical data by national statistical agencies has been fully completed. See Box 1.2, “Revisions in National Accounts Methodologies,” in the May 2000 World Economic Outlook.

Composite data for country groups in the World Economic Outlook are either sums or weighted averages of data for individual countries. Unless otherwise indicated, multiyear averages of growth rates are expressed as compound annual rates of change. Arithmetically weighted averages are used for all data except inflation and money growth for the other emerging market and developing country group, for which geometric averages are used. The following conventions apply.

  • Country group composites for exchange rates, interest rates, and the growth rates of monetary aggregates are weighted by GDP converted to U.S. dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP.

  • Composites for other data relating to the domestic economy, whether growth rates or ratios, are weighted by GDP valued at purchasing power parities (PPPs) as a share of total world or group GDP.3

  • Composites for data relating to the domestic economy for the euro area (12 member countries throughout the entire period unless otherwise noted) are aggregates of national source data using weights based on 1995 ECU exchange rates.

  • Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force.

  • Composites relating to the external economy are sums of individual country data after conversion to U.S. dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in currencies other than U.S. dollars. Composites of changes in foreign trade volumes and prices, however, are arithmetic averages of percentage changes for individual countries weighted by the U.S. dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year). For central and eastern European countries, external transactions in nonconvertible currencies (through 1990) are converted to U.S. dollars at the implicit U.S. dollar/ruble conversion rates obtained from each country’s national currency exchange rate for the U.S. dollar and for the ruble.

Classification of Countries

Summary of the Country Classification

The country classification in the World Economic Outlook divides the world into two major groups: advanced economies and other emerging market and developing countries.4 Rather than being based on strict criteria, economic or otherwise, this classification has evolved over time with the objective of facilitating analysis by providing a reasonably meaningful organization of data. A few countries are presently not included in these groups, either because they are not IMF members and their economies are not monitored by the IMF, or because databases have not yet been fully developed. Because of data limitations, group composites do not reflect the following countries: Afghanistan, Bosnia and Herzegovina, Brunei Darussalam, Eritrea, Liberia, Serbia and Montenegro, Somalia, and Timor-Leste. Cuba and the Democratic People’s Republic of Korea are examples of countries that are not IMF members, whereas San Marino, among the advanced economies, is an example of an economy for which a database has not been completed.

Each of the two main country groups is further divided into a number of subgroups. Among the advanced economies, the seven largest in terms of GDP, collectively referred to as the major advanced countries, are distinguished as a subgroup, and so are the 12 members of the euro area, and the four newly industrialized Asian economies. The other emerging market and developing countries are classified by region, as well as into a number of analytical and other groups. Table A provides an overview of these standard groups in the World Economic Outlook, showing the number of countries in each group and the average 2003 shares of groups in aggregate PPP-valued GDP, total exports of goods and services, and population.

Table A.

Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 20031

(Percent of total for group or world)

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The GDP shares are based on the purchasing-power-parity (PPP) valuation of country GDPs. The number of countries comprising each group reflects those for which data are included in the group aggregates.

General Features and Composition of Groups in the World Economic Outlook Classification
Advanced Economies

The 29 advanced economies are listed in Table B. The seven largest in terms of GDP—the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada—constitute the subgroup of major advanced economies, often referred to as the Group of Seven (G-7) countries. The euro area (12 countries) and the newly industrialized Asian economies are also distinguished as subgroups. Composite data shown in the tables for the euro area cover the current members for all years, even though the membership has increased over time.

Table B.

Advanced Economies by Subgroup

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On July 1, 1997, Hong Kong was returned to the People’s Republic of China and became a Special Administrative Region of China.

Table C.

European Union

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In 1991 and subsequent years, data for Germany refer to west Germany and the eastern Länder (i.e., the former German Democratic Republic). Before 1991, economic data are not available on a unified basis or in a consistent manner. Hence, in tables featuring data expressed as annual percent change, these apply to west Germany in years up to and including 1991, but to unified Germany from 1992 onward. In general, data on national accounts and domestic economic and financial activity through 1990 cover west Germany only, whereas data for the central government and balance of payments apply to west Germany through June 1990 and to unified Germany thereafter.

Other Emerging Market and Developing Countries

The group of other emerging market and developing countries (146 countries) includes all countries that are not classified as advanced economies.

The regional breakdowns of other emerging market and developing countries—Africa, central and eastern Europe, Commonwealth of Independent States, developing Asia, Middle East, and Western Hemisphere—largely conform to the regional breakdowns in the IMF’s International Financial Statistics. In both classifications, Egypt and the Libyan Arab Jamahiriya are included in the Middle East region rather than in Africa. Three additional regional groupings—two of them constituting part of Africa and one a subgroup of Asia—are included in the World Economic Outlook because of their analytical significance. These are sub-Sahara, sub-Sahara excluding Nigeria and South Africa, and Asia excluding China and India.

Other emerging market and developing countries are also classified according to analytical criteria and into other groups. The analytical criteria reflect countries’ composition of export earnings and other income from abroad, a distinction between net creditor and net debtor countries, and, for the net debtor countries, financial criteria based on external financing source and experience with external debt servicing. Included as “other groups” are the heavily indebted poor countries (HIPCs), and Middle East and north Africa (MENA). The detailed composition of other emerging market and developing countries in the regional, analytical, and other groups is shown in Tables D through F.

Table D.

Other Emerging Market and Developing Countries by Region and Main Source of Export Earnings

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Table E.

Other Emerging Market and Developing Countries by Region and Net External Position

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Star instead of dot indicates that the net debtor’s main external finance source is official financing.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and simi-latiries in economic structure.

Table F.

Other Developing Country Groups

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The first analytical criterion, by source of export earnings, distinguishes between categories: fuel (Standard International Trade Classification— SITC 3) and nonfuel and then focuses on non-fuel primary products (SITC 0, 1, 2, 4, and 68).

The financial criteria focus on net creditor and net debtor countries. Net debtor countries are further differentiated on the basis of two additional financial criteria: by official external financing and by experience with debt servicing.5

The other groups of developing countries constitute the HIPCs and MENA countries. The first group comprises the countries considered by the IMF and the World Bank for their debt initiative, known as the HIPC Initiative.6 Middle East and north Africa, also referred to as the MENA countries, is a World Economic Outlook group, whose composition straddles the Africa and Middle East regions. It is defined as the Arab League countries plus the Islamic Republic of Iran.

List of Tables

Medium-Term Baseline Scenario
Table 1.

Summary of World Output1

(Annual percent change)

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Real GDP.

Annual data are calculated from seasonally adjusted quarterly data.

In this table, “other advanced economies” means advanced economies excluding the United States, euro area countries, and Japan.

Mongolia, which is not a member of the Commonwealth of Independent States, is included in this group for reasons of geography and similarities in economic structure.

Table 2.

Advanced Economies: Real GDP and Total Domestic Demand

(Annual percent change)

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From fourth quarter of preceding year.

Fourth-quarter data are calculated from seasonally adjusted data.

Annual data are calculated from seasonally adjusted quarterly data.