Chapter

World Economic Outlook

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1988
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The performance of the world economy in the past two or three quarters has been considerably more satisfactory than was expected in the wake of the sharp stock market decline in October 1987. Output in the industrial countries has grown strongly, world trade has been robust, and inflation appears to have remained under control. Moreover, the shifts in real trade flows induced by earlier exchange rate movements are at last beginning to have a visible effect on the payments imbalances of the three largest countries. The coordination of economic policy among the major industrial countries has played a major role in these achievements. There is less cause for satisfaction about the economic situation in the developing world, but there are nevertheless some encouraging signs. Export earnings have grown strongly, in response to both the strength of activity in the industrial world and sharply higher prices of many commodities. As a result, developing countries’ aggregate debt to export ratio is now clearly falling, for the first time since the onset of the debt crisis six years ago.

These positive aspects of international economic developments need to be tempered by a recognition that progress has been uneven and that important uncertainties remain. In particular, the low-income and the heavily indebted countries have failed to share fully in stronger economic performance and prospects. Beyond this, the durability of growth in the industrial countries hinges on the answers to two key questions, one familiar and one of more recent origin. First, will financial markets be willing to finance at existing interest and exchange rates the large external imbalances that are still in prospect? Second, is inflation re-emerging as a significant danger that calls for policy adjustments?

The remainder of this report treats these issues in more detail, against the background of the staff’s revised short- and medium-term projections. The following section reviews recent developments and short-term prospects for the world economy. Subsequently, a medium-term baseline scenario is discussed, together with alternative scenarios of possible developments that are of interest in present circumstances. The next two sections deal, in turn, with policy issues facing industrial and developing countries. The basic theme here is how to make the current economic expansion more durable and more evenly distributed among countries.

Throughout the report, an attempt is made to focus on the key economic indicators identified by the Fund’s Executive Board and the Interim Committee. These indicators are used to review the central questions of economic policy interactions and to place policies and performance in a medium-term context.

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