Abstract

Developments in financial markets during the past eighteen months and signs of a softening of growth in the industrial countries since the beginning of 1995 have highlighted the sensitivity of financial markets to economic imbalances and the downside risks to the outlook. However, although economic performance has been adversely affected in some countries, there are many reasons to expect that the global economic expansion will proceed at a satisfactory pace. Fears of a pickup in inflation in the industrial countries have largely abated, long-term interest rates have again fallen substantially in most countries following the sharp increases in bond yields during 1994, coordinated foreign exchange market intervention by leading central banks and supportive policy developments have helped to correct the misalignment of key currencies that had emerged earlier in the year, contagion effects from the financial crisis in Mexico have been contained, and growth in most of the emerging market countries in the developing world and among the transition countries has remained robust. While the short-term projections for the industrial countries have been marked down somewhat, the forecasts for many developing countries are now even stronger than expected in the May 1995 World Economic Outlook (see Table 1).

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