A slowdown in global economic growth and a measure of uncertainty about its duration and intensity are the principal concerns expressed in the May 2000 World Economic Outlook, the IMF’s biannual wrap-up of economic developments and prospects. Speaking at a press briefing on April 26 at which the report was released, Michael Mussa, Economic Counsellor and Head of the IMF’s Research Department, said: “We are clearly looking at a substantial and broadly distributed slowdown in global economic growth this year; but not—or, at least not yet—at a likely global recession.”
A general slowdown
As the World Economic Outlook notes, some slowdown from the rapid rates of global growth of late 1999 and early 2000 was both desirable and expected, but the weakening of growth—led by a marked slowdown in the United States, a stalling recovery in Japan, and moderating growth in Europe and in a number of emerging market countries—is proving to be steeper than thought earlier. Accordingly, Mussa said, the IMF staff’s forecast for world economic growth for 2000 has been cut by one full percentage point from 4.2 percent to 3.2 percent. For the United States—the mainstay of global expansion in the past decade—growth this year is forecast to be only 1.5 percent, down from almost 5 percent last year, and the lowest for a decade. In the euro area, Mussa said, growth is now expected to be only 2.4 percent—a full percentage point less than expected last September—while in Japan, the situation is even more worrying, with growth now forecast to be barely over ½ of 1 percent for this year, and projected to reach only 1.5 percent for next year.
In emerging market economies, according to the World Economic Outlook, the revisions to previous forecasts vary, depending in part on the closeness of economic linkages with the United States. Growth has been marked down substantially in emerging Asia and Latin America, although growth in China and India is expected to remain reasonably well sustained. In contrast, most countries in Africa, the Middle East, the transition countries of Central and Eastern Europe, the Commonwealth of Independent States, and Mongolia have been less affected. For the transition countries in particular, Mussa noted, relative optimism still seems warranted, provided that growth prospects for Western Europe do not deteriorate significantly further.
Recovery or recession?
Despite the sharper than expected slowdown in global growth, the World Economic Outlook suggests there is a reasonable prospect that the slowdown will be shortlived. This “relative optimism,” Mussa said, is strongly supported by the vigorous policy responses already undertaken in several key countries. The U.S. Federal Reserve, for example, has already cut overnight interest rates 200 basis points, he noted, and further moderate cuts may be expected if incoming evidence confirms continuing weakness. Meanwhile, substantial tax cuts now seem certain to begin providing support for demand.
In Japan, however, policy room is clearly more limited, Mussa noted. Under the new monetary policy framework, stimulative actions beyond the return to zero short-term interest rates can and should be used to combat deflation, he said. In addition, the new prime minister has placed a very high priority on aggressive efforts to recognize and resolve problems in the Japanese financial system, which, Mussa said, is essential to lay the foundation for stronger sustained growth and to signal the change in policy approach needed to reinvigorate confidence.
In most other industrial countries, Mussa observed, improvements in fiscal positions in recent years now allow for tax reforms that will help to support demand in the midst of global slowdown. Also, with inflation generally well contained in most other industrial countries, central banks have begun to cut policy interest rates in measured efforts to combat economic weakening.
The euro area, Mussa said, is so far the one important exception to the move toward monetary easing. With growth appearing likely to be better sustained than in the United States or Japan, and with headline inflation still running above its medium-term desired ceiling, the European Central Bank (ECB) has kept policy interest rates on hold since last autumn. Although this generally has been a prudent policy, Mussa suggested that as growth prospects have softened for the euro area and for the global economy, the implications are that inflationary pressures will be less of a concern. Therefore, in a period when general economic slowdown is the principal concern and when inflation is not likely to be a continuing threat, an easing of monetary policy in the euro area—the second largest monetary area in the world—would be helpful for world growth, he said.
The World Economic Outlook cites two additional reasons to support its cautiously optimistic projection that the slowdown may be relatively moderate and short-lived:
Long-term interest rates in the United States have fallen during 2000 and, more recently, short-term rates have been cut significantly. This should begin to have a direct effect on U.S. activity in the second half of the year, providing support to the global economy.
Although a number of countries continue to face serious difficulties, external and financial vulnerabilities in emerging market economies have been generally reduced since the 1997-98 crisis, and a general shift away from soft exchange rate pegs has improved their ability to manage external shocks.
The World Economic Outlook’s baseline scenario projects that economic growth in the United States will pick up during the second half of the year, while growth in Europe remains reasonably robust, and the recovery in Japan resumes in 2002. In emerging market economies, external financing conditions should gradually improve during the remainder of the year, consistent with a modest pickup in capital flows. While global growth in 2001 will still slow significantly, it will remain well above earlier troughs, the study suggests, and return close to trend in 2002. However, the IMF staff study warns, a deeper and more prolonged slowdown in the United States would pose several interlinked risks for the global outlook that would significantly increase the chance of a more synchronized and self-reinforcing downturn developing. In particular, there remains a risk that the substantial imbalances that have developed in the U.S. economy during the expansion, including the high U.S. current account deficit and apparent overvaluation of the U.S. dollar, the negative personal savings rate, and—despite recent declines—still richly valued equity markets, could adjust in a disorderly fashion.
But, Mussa reiterated, it was reassuring that, in the face of this global slowdown, most countries that have flexible policy instruments have responded promptly and reasonably aggressively to the threat that things might be somewhat worse than the World Economic Outlook has allowed for in its baseline scenario.
Other policy issues
In addition to its coverage of overall prospects and policy challenges, the World Economic Outlook also provides analyses of specific, relevant policy issues. At the press briefing, David Robinson, Assistant Director, and Tamim Bayoumi, Chief of the World Economic Studies Division in the IMF’s Research Department, highlighted some of the key findings of these studies.
One study, Robinson said, looks at the impact of the global fall in the value of technology stocks—which have averaged 20 to 30 percent of GDP in many advanced economies—and its impact on demand. There are indeed significant effects in North America and the United Kingdom, although not very different from those from nontechnology stocks. More surprisingly, there is also a marked effect in continental Europe, although the impact of nontechnology stocks there is rather small. This suggests that the decline in technology stocks will have a significant impact on demand looking forward.
Another study, building on work in the October 2000 World Economic Outlook (see IMF Survey, October 9,2000, page 335), looks at the determinants of exchange rate movements among the major currencies, and particularly the strength of the U.S. dollar and the weakness of the euro. The study, Robinson said, offers evidence supporting the idea that movements in the euro-dollar exchange rate have been associated with equity flows from the euro area to the United States and with relative expected growth rates between the two areas. Equity flows do not, however, explain movements in the yen-dollar rate, which appear to be more affected by current account developments and long-term interest rate differentials.
A third study looks at Africa’s integration into the global economy, Robinson said. Africa’s share of global trade has declined steadily, and the World Bank has calculated that the loss of market share since 1950 has cost about one-fifth of GDP. The study finds evidence that Africa does, indeed, “undertrade” relative to other developing countries and that further trade liberalization—and a “streamlining” of what has become a very complex network of regional trade agreements in Africa—is an important element of the policy agenda. But, Robinson stressed, Africa’s trading partners must also play their role by eliminating barriers to African and other developing country exports.
Recent improvements in fiscal balances in advanced countries are discussed in chapter 3. These improvements, Bayoumi explained, rest largely on expenditure restraints rather than on tax increases. This should be seen as a desirable development, Bayoumi observed, since a substantial body of evidence indicates that expenditure restraint can have a longer lasting impact on the fiscal position than tax increases. Nonetheless, the durability of recent improvements has yet to be tested by a slowdown in activity, while in many countries fiscal pressures from aging populations also posed serious challenges.
The last chapter in the World Economic Outlook, Bayoumi said, documents the extraordinary improvement in inflation performance in emerging market economies, where average rates have fallen to levels not seen since the 1930s. On a global scale, improvements in inflation in advanced countries have helped, both by providing a more stable anchor for developing countries’ monetary policies and by providing improved operating rules for developing countries’ monetary regimes, including through inflation targeting. On the domestic side, the move to hard pegs or inflation targeting has supported the anti-inflationary effort, particularly when accompanied by a policy of fiscal consolidation.
The text of the World Economic Outlook is available on the IMF’s website (www.imf.org). Printed copies will be available later this month.
Ian S. McDonald
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