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IMF Survey Vol.29, No.19 October 2000
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World Economic Outlook: Global economy continues to strengthen, but higher oil prices and imbalances raise concerns

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2000
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The global economic expansion following the slowdown of 1997-98 has continued to gain strength, with global output growth projected at 4.7 percent in 2000—0.5 percentage point higher than the May estimate—according to the IMF’s latest World Economic Outlook. The improvement has been led by the continued strength of the U.S. economy, recoveries in several emerging market economies, a robust expansion in Europe, and a nascent—if still fragile—recovery in Japan. Nevertheless, the report cautions, economic and financial imbalances in the three main currency areas remain large, and higher oil prices have become an increasing concern. Also, a number of countries continue to experience serious economic problems—in some cases due to natural disasters and adverse movements in commodity prices—while the HIV/AIDS pandemic poses a severe human and economic threat, particularly in sub-Saharan Africa and parts of Asia.

Speaking at a press conference in Prague on the eve of the IMF-World Bank Annual Meetings, Michael Mussa, the IMF’s Economic Counsellor and Director of the Research Department, said the world economy “in the first year of the new millennium is enjoying the strongest growth in more than a decade” Further, Mussa said, despite recent increases in oil prices, inflation in the world economy remains contained.

Virtually all of the world’s major regions are recording strong growth, Mussa noted, led by the U.S. economy, which the World Economic Outlook projects will grow at 5.2 percent for 2000. Other cyclically advanced economies, such as the United Kingdom, Australia, Canada, and Ireland, also recorded strong growth performances.

In other regional developments, Mussa noted that emerging Asia has come back strongly from the crisis of 1997-98 and is turning in even stronger growth this year, while Japan now appears to be on course to recovery. Latin America, which, according to Mussa, had a “tough year” in 1999, is performing much better this year, while the transition economies are turning in their strongest growth performance since the start of the transition, led by the rapid recovery of the Russian economy from the severe crisis of autumn 1998. Other developing countries around the world, Mussa observed, are, with some exceptions, generally doing quite well.

Areas of concern

Despite the strength of the global recovery, the World Economic Outlook notes, many countries continue to face deep-seated economic problems, and 1.2 billion people still subsist on less than $1 a day. The report cites other areas of concern, including the following.

• A number of economic and financial imbalances remain, including the uneven pattern of GDP and demand growth among the three major currency areas and the associated imbalances in their current accounts; the apparent deviations of major currency exchange rates from medium-term fundamentals, particularly, the euro and the U.S. dollar; and the still high level of equity market valuations in the United States and some other countries.

• Oil prices have been significantly higher than previously expected, because of both supply constraints in producing countries and the continued strength of global demand. In fact, as Mussa noted in the press conference, the World Economic Outlook’s forecast for world economic growth in 2001 (4.2 percent), which was completed before the recent run-up in oil prices, may be at risk now.

• The amount of monetary tightening that may be needed to control inflationary pressures in the United States and some other countries is unclear, especially if the recent run-up in oil prices is sustained.

• As recent experience has shown, the continuing financial imbalances—combined with recent reductions in the depth of and liquidity in financial markets—could generate further volatility in mature financial markets.

Recent developments and projections

As noted earlier, the IMF staff’s baseline scenario, as reported in the World Economic Outlook, envisages a modest slowdown in global GDP growth to 4.2 percent in 2001, followed by continued strong growth at about the same rate. This projection, however, is predicated on the assumption that the imbalances in the global economy are resolved in an orderly fashion and that the U.S. economy, in particular, experiences a soft landing. As Mussa explained, this means U.S. GDP growth would slow to about 3 percent in 2001 on a fourth-quarter to fourth-quarter basis, with unemployment rising modestly but enough to contain any significant further rise of inflationary pressures. Although the World Economic Outlook provides an alternate “hard landing” scenario for the United States, Mussa said that even with the spillover from the rise in oil prices, which will probably tilt real output growth downward for the U.S. and the world economy, as well as tilting “headline” inflation up, he expected the outcome would be similar to the baseline scenario, which posits a soft landing for the U.S. economy.

In Europe, the expansion in the euro area has gathered strength, with GDP growth rising to 3¾ percent in the second half of 1999 and continuing at a similar rate in the first quarter of 2000, according to the World Economic Outlook, while core inflation, at about 1.3 percent, has remained subdued. However, the euro hit record lows against the U.S. dollar and most other major currencies in mid-May and again in early September. By early September, the report notes, the euro had depreciated over 15 percent in nominal effective terms since its inception in 1999 and is below the level that could be justified by medium-term fundamentals.

As Mussa noted, the World Economic Outlook discusses a number of reasons why the euro has weakened, including faster growth in the United States than in Europe, the slow pace of structural reform, and a very strong U.S. dollar. However, he said, these explanations account for only about half of the depreciation of the euro; the rest, he suggested, was the result of the “manic-depressive nature of the market.” It has shifted from depressive on the dollar to manic, thus pushing the euro too low, relative to a plausible assessment of fundamentals. In response to a question about the possibility of intervention in support of the euro, Mussa said the circumstances in which the major countries would want to use intervention to attempt to influence exchange rates are “relatively rare,” but they do arise from time to time, and one would need to ask, “if not now, when?” Intervention that does not involve any change in monetary policies in the countries involved in the intervention has been shown to have relatively limited effects, he said. Intervention does tend to be significantly more effective when it is coordinated among the major countries and when those countries, in effect, send the signal that it is their joint judgment that markets have pushed exchange rates substantially away from fundamentals and some correction is warranted. [Subsequent to the press conference, at the initiative of the European Central Bank, the monetary authorities of the United States, Japan, the United Kingdom, and Canada joined with the European Central Bank on September 22, in a concerted intervention in exchange markets.]

In response to a question about the prospects for Africa and sub-Saharan Africa, David Robinson, Assistant Director in the Research Department, said that Africa was no exception to the general global pickup, with growth in 2000 expected to rise to 3.4 percent from 2.2 percent in 1999. The picture in sub-Saharan Africa, however, is mixed, depending on the effect of commodity prices. The oil exporters are doing well, but those countries dependent on non-oil commodity exports have suffered a “double whammy,” because the prices of their exports have remained weak, while the price of oil has risen sharply. Robinson referred also to the World Economic Outlook’s coverage of the economic impact of AIDS. In many countries, over 20 percent of the adult population is infected by HIV/AIDS, providing a dramatic sense of the huge human and economic magnitude of the problems these countries are facing. Although some countries—like Uganda—have been able to keep the HIV prevalence ratio low through preventative measures, Robinson said in those countries where the ratio is very high, there will be a need not only for preventative measures but also for additional international assistance.

Special issues

The special topic highlighted in the World Economic Outlook is the transition economies, their experience over the past decade, and prospects, especially for candidates for entry into the European Union (EU). The first part of the review looks at the overall experience with transition, Robinson noted, covering not only Europe, Russia, and the other countries of the former Soviet Union but also Asia, including China.

One striking feature of the transition process, Robinson said, has been the generally better performance of the countries applying for EU membership. While some of this reflects more favorable initial conditions than those faced by others less advanced in the transition process, it also reflects greater strides taken toward structural and institutional reform.

The second part of the review looks in more detail at the European enlargement process from the perspective of both the accession countries and the European Union itself.

The World Economic Outlook also includes a number of shorter pieces on issues of interest, Robinson said, including evidence of the “new economy” in the United States and elsewhere and the implications for policies; developments in global equity markets; and developments in commodity prices, including oil.

The texts of both the World Economic Outlook and Michael Mussa’s press conference are available on the IMF’s website (www.imf.org). The print edition of the World Economic Outlook will be available in early November and may be obtained from IMF Publication Services. (See page 334 for ordering information.)

Ian S. McDonald

Editor-in-Chief

Sara Kane

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Sheila Meehan

Senior Editor

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Assistant Editor

Sharon Metzger

Senior Editorial Assistant

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Editorial Assistant

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Graphic Artist

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