Journal Issue

World Economic Outlook: Return to normal growth predicted

International Monetary Fund. External Relations Dept.
Published Date:
October 2003
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For the first time in a very long time, the IMF is reasonably optimistic that the global economy will shortly return to normal growth, said Kenneth Rogoff, Economic Counsellor and Director of the Research Department. In opening remarks at a September 18 press conference releasing the September 2003 World Economic Outlook (WEO), he noted that immediate geopolitical uncertainties have receded, aftershocks from the bursting of the equity price bubble are dissipating, and the massive policy stimulus put in place after the downturn is starting to bear fruit. But the growth will not be balanced: in the United States and emerging Asia, the only question is how long the rebound will be sustained, whereas Europe is struggling to turn the corner and Japan’s prospects, though clearly improving, remain clouded.

Looking down the road to the second half of 2004 and beyond, there are still many risks, Rogoff noted. For example, the disturbing global pattern of current account imbalances is likely to get worse before it gets better as the United States continues to absorb a large share of world savings while Asia provides much of it. The U.S. recovery has not produced jobs, which poses some risk to consumption, as does the significant possibility of a housing price bust in some countries—especially as historically low interest rates rise when the global economy picks up. Another cloud on the horizon is the high and growing level of public indebtedness throughout the world (see IMF Survey, September 8, page 255). Still, given how long it has taken to get a sustained pickup under way since the 2001 slowdown, an unbalanced recovery is far preferable to none at all, Rogoff observed.

The WEO baseline projections for global growth in 2003 and 2004 have not changed since the spring WEO: 3.2 percent for 2003 and 4.1 percent, just a little bit above normal, for 2004. But now the IMF sees at least as much upside potential as downside risk over the next 9-12 months.

Mixed picture in industrial countries

In the United States, much of the incoming data, including on productivity, are strong, and the forecast for U.S. growth of 2.6 percent in 2003 and 3.9 percent in 2004 seems realistic. In fact, the prospects until, say, late 2004 are that these projections might even be exceeded. After that, however, while the U.S. productivity numbers continue to be encouraging, the twin fiscal and external current account deficits will eventually have to be reined in.

What about Japan? It has seen a remarkable uptick in its GDP numbers lately, so the WEO upped its growth forecast for 2003 to 2 percent and, for 2004, to 1.4 percent. However, Japan is not yet out of the woods. Trade with booming emerging Asia, including China, has helped fuel short-term growth, as has business fixed investment. But underlying problems with corporate and bank balance sheets, the soaring government debt, and entrenched deflationary expectations are all still major roadblocks to strong sustainable growth.

As for Europe, the most concrete positive news seems to be the good news elsewhere, Rogoff said regretfully. Germany, Italy, and the Netherlands were all in recession in the first half of the year, and French GNP declined in the second quarter, as did GDP for the euro area as a whole. Weak consumer confidence and fragile corporate balance sheets are among the main problems. For the moment, Rogoff remarked, most Europeans who want to see an economic recovery will have to watch it on TV. But if the forecasts are right, euro-area growth will pick up from 0.5 percent in 2003 to 1.9 percent in 2004. The WEO’s tepid optimism is based on projections of higher exports to the rest of the world, as well as the fact that there is considerable synchronization between Europe’s economy and that of the United States based on many common variables, including technology, oil prices, and confidence. Last but not least, recent months have seen a number of promising initiatives on the structural reform front, including the German government’s plans to reform labor markets and the French government’s attempts to deal with the politically sensitive pension issues.

Growth resilient in developing countries

As for the rest of the world, China and India’s strong growth portends an inevitable changing of the guard in Asia, Rogoff said. The WEO projects China’s growth at 7.5 percent for both 2003 and 2004, and the risks are quite possibly tilted to the upside there. India is also expanding strongly, with growth forecast at 5.6 percent in 2003 and 5.9 percent in 2004. In Latin America, a tentative recovery seems to be emerging on the back of strong exports, though domestic demand is still weak. Growth in sub-Saharan Africa (excluding South Africa) remains resilient at 3.6 percent in 2003 and 5.9 percent in 2004, though the latter depends on a substantial improvement in political stability and favorable weather conditions.

In the Middle East and North Africa region, growth is forecast at 5.2 percent in 2003 and 4.5 percent in 2004, but longer-term growth depends on tackling some of the structural issues discussed in the WEO. The baseline forecast for the price of oil in 2004 is $25 a barrel, though to describe oil prices as difficult to forecast would be quite an understatement.

In short, Rogoff said, although there is now good cause for reasonable optimism that the global economy is finally digging its way out of a hole, this is certainly no time for complacency. The recent collapse of trade negotiations in Cancún is a tragedy—not least, he added, because without stronger trade, global growth will eventually slow significantly and global poverty will rise.

China’s trade surplus

In response to a reporter’s question about the degree to which China’s trade surpluses with the United States and the European Union were due to an undervalued exchange rate, Rogoff said, first, that one should look at multilateral rather than bilateral current account balances and exchange rate relationships and, second, that the many controls in China’s economy make it hard to isolate the impact of the exchange rate on the current account. True, the current constellation of controls and the fact that China is accumulating reserves at a rapid rate suggest that, everything else equal, there is significant pressure for appreciation. But the world was having the same debates about Japan 15-20 years ago, where at times the more the yen appreciated, the bigger the trade balance surplus it seemed to run, indicating there was not such a simple direct correlation.

After Cancún

Asked to gauge the likely macroeconomic implications of the failure of world trade talks in Cancún, Rogoff pointed to the steady expansion in global trade over the post-World War II period as a major factor in raising world incomes and reducing world poverty. It is of considerable concern, he observed, that trade has been slowing over the past decade. Continued trade growth is important for maintaining the high levels of productivity growth in recent years, which many people take for granted.

Also queried about whether WEO growth projections for the Middle East tallied with the current situation there, Rogoff responded that the projections assume higher oil prices and increased oil production, while the security situation in the Middle East has hindered growth—for example, through its effects on tourism. There has, he said, been progress in some areas of structural reform, but, certainly, over the longer term, further reform—including flexible economies, diversifying away from oil production, opening economies to trade, strengthening institutions, and reducing the role of the public sector—will be needed to increase growth. The big challenge is to achieve higher and sustained per capita growth and thereby address high unemployment across the region.

Global recovery is expected to resume in late 2003

(real GDP; percent change from four quarters earlier)

Imbalances and currency questions

For the global economy, current account imbalances pose a serious problem for the medium term, and the problem, Rogoff replied to another question, is probably getting worse with the unbalanced recovery. Some day, the U.S. current account deficit—now over 5 percent of GDP—has to unwind, and, when it does, there will be a sharp drop in the dollar. The question is, Where will the burden of adjustment fall? Clearly, if the euro has to bear the lion’s share of the adjustment, that will create a lot more difficulties than if it is more evenly distributed, with some accompanying appreciation in Asian currencies. “It is bad enough that the global economy has been flying on one engine,” Rogoff noted, “but it is going to be a lot worse if it has to land on one wheel”.

Copies of the World Economic Outlook, September 2003, are available for $49.00 ($46.00 for academics) each from Publication Services. See page 294 for ordering information. The full text of the World Economic Outlook is also available on the IMF’s website (

Laura Wallace


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October 6, 2003

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