Following a series of adverse shocks in the first half of 2003, there are now increasing signs of a renewed recovery, and the balance of risks—in April, tilted well to the downside—has improved significantly. But with the pace and robustness of the recovery still unclear, and inflationary pressures low, monetary policies should remain accommodative for the time being; fiscal policies increasingly need to focus on medium-term consolidation, especially given coming demographic pressures. The widening global imbalances, and continuing dependence of global growth on the United States, underscore the need for an acceleration of structural reforms in many countries, along with measures to rein in the U.S. budget deficit over the medium term and, in some cases, a gradual move to greater exchange rate flexibility.

When the last World Economic Outlook was published in April 2003, the IMF staff expected—provided the war in Iraq was short and contained—that the global recovery would resume in the second half of the year, with global growth picking up to about 4 percent in 2004 (Table 1.1 and Figure 1.1). In the event, with major hostilities in Iraq indeed ending quickly, forward-looking indicators generally turned up, with equity markets strengthening markedly, accompanied by some pickup in business and consumer confidence, particularly in the United States (Figure 1.2). Concurrent data initially remained weak, with industrial production and trade growth slowing markedly in the second quarter (Figure 1.2), reflecting continued geopolitical uncertainties, the continued aftereffects of the bursting of the equity price bubble, and—particularly in Asia—the impact of Severe Acute Respiratory Syndrome (SARS). Most recently, however, there have been growing signs of a pickup in activity—including investment—particularly in the United States, Japan, and some emerging market countries, notably in Asia. With inflationary pressures very subdued, macroeconomic policies have been eased further across the globe. Interest rates have been reduced in Europe and the United States, as well as in a number of other industrial and emerging market countries; and fiscal policy has been further relaxed in the United States and a number of Asian countries. That said, the degree of macroeconomic stimulus among the major industrial countries continues to vary widely, with significant stimulus in the pipeline in the United States and the United Kingdom and relatively little in the euro area and Japan (Figure 1.3).

Table 1.1.

Overview of the World Economic Outlook Projections

(Annual percent change unless otherwise noted)

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Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during July 1-28, 2003.

Using updated purchasing-power-parity weights, summarized in the Statistical Appendix, Table A.

Includes Indonesia, Malaysia, the Philippines, and Thailand.

Includes Malta.

Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $24.96 in 2002; the assumed price is $28.50 in 2003, and $25.50 in 2004.

Figure 1.1.
Figure 1.1.

Global Indicators1

(Annual percent change unless otherwise noted)

Global growth in 2003 is expected to remain subdued, but to return close to trend in 2004.

1 Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of purchasing-power-parity weights unless otherwise noted.2 Average growth rates for individual countries, aggregated using purchasing-power-parity weights; the aggregates shift over time in favor of faster growing countries, giving the line an upward trend.3 GDP-weighted average of the 10-year (or nearest maturity) government bond yields less inflation rates for the United States, Japan, Germany, France, Italy, the United Kingdom, and Canada. Excluding Italy prior to 1972.4 Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil.
Figure 1.2.
Figure 1.2.

Current and Forward-Looking Indicators

(Percent change from previous quarter at annual rate unless otherwise noted)

Industrial production and trade growth remained weak in the second quarter of 2003, particularly in industrial countries; forward-looking indicators have improved somewhat, most clearly in the United States.

Sources: Business confidence for the United States, the National Association of Purchasing Managers; for the euro area, the European Commission; and for Japan, Bank of Japan. Consumer confidence for the United States, the Conference Board; for the euro area, the European Commission; and for Japan, Cabinet Office (Economic Planning Agency). All others, Haver Analytics.1 Australia, Canada, Denmark, euro area, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States.2 Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Pakistan, Peru, the Philippines, Poland, Russia, Singapore, South Africa, Taiwan Province of China, Thailand, Turkey, and Venezuela.3 Data for China, India, Pakistan, and Russia are interpolated.
Figure 1.3.
Figure 1.3.

Fiscal and Monetary Easing in the Major Advanced Countries


Monetary and fiscal policies remain significantly more expansionary in the United States and the United Kingdom than in the euro area and Japan.

Source: IMF staff estimates.1 For Japan, excludes bank support.

In mature financial markets, the combination of ample liquidity, monetary easing, and the expectation that low policy interest rates will be maintained for longer than earlier thought drove long-run interest rates down to 40-year lows by mid-June. Since that time, long-run interest rates have rebounded, most sharply in the United States (Figure 1.4), apparently reflecting growing expectations of recovery, higher inflationary expectations, and the continuing strong supply of government paper.1 Even so, the recent rebound has had only a limited effect on equity markets, which have retained their substantial gains since March, and on corporate spreads, which have benefited from actual and anticipated progress in corporate restructuring and continued positive risk appetite. In currency markets, the U.S. dollar continued to depreciate through mid-May, reflecting a combination of relatively low interest rates and continued investor concerns about the large U.S. current account deficit, though since then it has strengthened somewhat. Overall, since its peak in early 2002, the U.S. dollar has fallen by some 12 percent in nominal effective terms, matched by a substantial appreciation of the euro, the Canadian dollar, and some other industrial country currencies.

Figure 1.4.
Figure 1.4.

Developments in Mature Financial Markets

Long-run interest rates have rebounded since mid-June, but remain relatively low by historical standards. Equity markets have continued to rise, accompanied by falling credit spreads.

Sources: Bloomberg Financial Markets, LP; State Street Bank; HBOS plc; Office of Federal Housing Enterprise Oversight; Japan Real Estate Institute; and IMF staff estimates.1 IMF/State Street risk appetite indicators.2 Halifax housing index as measured by the value of all houses.3 House price index as measured by the value of single-family homes.4 Urban land price index: average of all categories in six large city areas.

In emerging markets, financing conditions eased significantly through June, aided by low industrial country interest rates and improved sentiment toward a number of key markets, notably Brazil. Financing costs have risen since then, reflecting higher U.S. interest rates, but spreads have continued to decline (Figure 1.5); and while primary issuance has slowed, this appears to have been largely discretionary, with little evidence of an underlying tightening of market access. With capital outflows from many countries slowing, net private capital inflows to emerging markets are projected to rise to over $110 billion in 2003, the highest level since the mid-1990s (Table 1.2). Emerging market currencies have in general been little affected by the fall in the U.S. dollar—indeed, most have depreciated in nominal effective terms since the dollar peak (Figure 1.6). In Asia, which has continued to run large surpluses on both current and capital accounts, this has been accompanied by a very large increase in reserves (see the second essay in Chapter II, “Are Foreign Exchange Reserves in Asia Too High?”).

Table 1.2.

Emerging Market Economies: Net Capital Flows1

(Billions of U.S. dollars)

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Net capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including official and private borrowing. Emerging markets include developing countries, countries in transition, Korea, Singapore, Taiwan Province of China, and Israel.

Excludes Hong Kong SAR.

Because of data limitations, other private capital flows, net may include some official flows.

A minus sign indicates an increase.

The sum of the current account balance, net private capital flows, net official flows, and the change in reserves equals, with the opposite sign, the sum of the capital and financial account and errors and omissions. For regional current account balances, see Table 27 of the Statistical Appendix.

Includes Korea, Singapore, and Taiwan Province of China in this table.

Includes Israel and Malta.

Historical data have been revised, reflecting cumulative data revisions for Russia and the resolution of a number of data interpretation issues.

Figure 1.5.
Figure 1.5.

Emerging Market Financial Conditions

Emerging markets spreads have fallen sharply and equity markets have picked up in concert with developments in mature markets.

Sources: Bloomberg Financial Markets, LP; Capital Data; and IMF staff estimates.1 Average of 60-day rolling cross-correlation of emerging debt market spreads.
Figure 1.6.
Figure 1.6.

Selected Countries: Exchange Rate and Interest Rate Developments

(Movement since February 2002; percent)

The fall of the U.S. dollar since its peak in February 2002 has been matched by appreciation in the euro area, Canada, and some smaller industrial countries; in most of the last group, the contractionary impact has been partly or fully offset by monetary easing. Emerging market currencies have generally depreciated.

Sources: Bloomberg Financial Markets, LP; and Global Insight.1 Australia and New Zealand.2 Denmark, Narway, and Sweden.3 Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.4 Chile, Colombia, Peru, and Venezuela.5 Indonesia, Malaysia, the Philippines, and Thailand.6 Czech Republic, Hungary, and Poland.

Commodity markets have continued to be heavily influenced by geopolitical developments, the cyclical situation, and supply shocks. After peaking at over $34 a barrel before the war, oil prices fell back sharply in April, but by end-August had returned to $30 a barrel, reflecting a slower-than-expected recovery in Iraq’s oil production, persisting tight industrial country inventories, and concerns about the sustainability of current production levels in Nigeria and Venezuela. In early September, oil prices fell back, and—while they are expected to remain elevated during the remainder of 2003—they are projected to drop to an average $25.50 a barrel in 2004 in the face of rising supply, including from Iraq; indeed, many oil market analysts see a possibility of a significantly larger price decline. (See Appendix 1.1, “Longer-Term Prospects for Oil Prices.”) In contrast, nonfuel commodity prices are projected to rise moderately, aided by rising global activity and the fading of earlier supply shocks (see Appendix 1.2 “Nonenergy Commodity Prices and Semiconductor Markets”).

At the current conjuncture, several issues remain important in assessing the speed and nature of the recovery, including:

  • How long will the aftereffects of the bubble—defined broadly as discussed below—persist? As stressed at the time of the last World Economic Outlook, the recent weakness of the world economy has not just been due to the war. The equity boom in the late 1990s was the largest in modern history: the unwinding of its effects is uncharted territory, and it is perhaps not surprising that most observers, including the World Economic Outlook, have found it difficult to gauge the aftermath. While the direct impact of equity market losses on household consumption growth should now have peaked, household balance sheets in some countries, notably the United States, remain stretched and housing markets—boosted in part by the aggressive easing of monetary policy in the last three years—are unlikely to provide the same support to the recovery going forward as they did in the past. In addition, the adjustment process in the corporate sector and, to a lesser extent, in the financial sector—eliminating excess capacity, restructuring of balance sheets, and rebuilding defined benefit pension funds—still has some way to go, particularly in Europe; and recent accounting scandals may continue to weigh on corporate confidence.

  • Will the U.S. dollar experience a renewed depreciation, and, if so, will the euro continue to bear the brunt of the off setting adjustment? To date, the decline in the U.S. dollar has been relatively orderly and—given the large U.S. current account deficit—generally welcome, and the resulting tightening in financial conditions in the euro area has been largely offset by European Central Bank (ECB) interest rate cuts (see Box 1.1, “Recent Changes in Monetary and Financial Conditions in the Major Currency Areas,” p. 14). While the World Economic Outlook projections are, as usual, based on the assumption that real effective exchange rates remain constant, further substantial dollar depreciation cannot be ruled out and would have significant implications for the outlook, especially if the offsetting appreciation continued to be focused on the euro area rather than spread more widely.

Consistent with the signs of renewed recovery discussed above, the IMF staff’s baseline forecast continues to project an upturn from the second half of 2003 (Figure 1.7). Global GDP growth is expected at 3.2 percent in 2003, rising to 4.1 percent—close to trend—in 2004, underpinned by reduced geopolitical uncertainties, policy stimulus in the pipeline, a pickup in inventories, the projected decline in oil prices, and a gradual diminution of the aftereffects of the bubble (see Box 1.2, “How Should We Measure Global Growth?” p. 18). Monetary policies are expected to remain accommodative, with a gradual withdrawal of stimulus unlikely to begin until 2004; in Japan, the quantitative easing policy is expected to continue. Looking across individual countries and regions:

  • Among the industrial countries, recovery will continue to be led by the United States where—despite a weak labor market and considerable excess capacity—current data have shown greatest signs of improvement, forward-looking indicators are strongest, and there is the most policy stimulus in the pipeline (Table 1.3). In the euro area, the forecast has once again been significantly reduced, reflecting continued disappointing private domestic demand and the appreciation of the euro. With the overall policy stance less supportive and the region-wide outlook adversely affected by the continuing difficulties in Germany, the projected pickup is expected to be relatively gradual, supported mainly by a gradual pickup in private consumption (underpinned by lower interest rates and the automatic stabilizers) and inventories, and the expected improvement in external demand. In Japan, given the stronger-than-expected second quarter outturn, the stock market pickup, and heightened optimism about the U.S. recovery, the forecast has been revised upward significantly for both 2003 and 2004. However, with the outlook still clouded by deflation and corporate and banking system weaknesses, the pace of recovery is still expected to remain moderate.

  • The outlook for emerging markets continues to be driven—to differing extents—by developments in industrial countries, external financing conditions, geopolitical factors, and country-specific developments. In emerging markets in Asia, with the effects of SARS now waning, growth is expected to pick up in the second half of 2003 and remain strong in 2004, aided by timely additional policy easing and continued robust growth in China. However, much will depend on a prompt rebound in domestic demand, as well as the pace of the global recovery and a continuation of the nascent recovery in the information technology (IT) sector. Activity in much of Latin America appears to be stabilizing and external confidence in the region—particularly Brazil—has improved markedly. Nonetheless, the recovery remains fragile and, with a number of countries facing significant debt problems and political uncertainties, the region remains vulnerable to a reversal in financial market sentiment. In the Middle East, while the quick end to the conflict in Iraq has boosted confidence, the fragile security situation remains a major source of uncertainty; GDP growth forecasts for the region have been revised upward in 2003 owing to higher oil production, but lower oil prices will adversely affect the outlook in 2004. Reduced geopolitical concerns also benefit Turkey although, to maintain investor confidence, the authorities need to firmly maintain the sustainability of the fiscal position. Growth in the transition countries remains solid, led by Russia and Ukraine; European Union (EU) accession countries continue to benefit from strong direct investment inflows, although weak euro area demand remains an important risk.

  • Among the poorest countries, GDP growth in sub-Saharan Africa (excluding South Africa) is projected to rise to 3.6 percent in 2003, with the positive effects of improved macroeconomic policies, rising commodity prices, and debt relief under the Heavily Indebted Poor Countries (HIPC) initiative partly offset by continued political instability and adverse weather conditions (the latter—together with the high incidence of HIV/AIDS—contributing to serious food shortages in the Horn of Africa and Southern Africa). GDP growth is expected to pick up markedly in 2004 but, as in the past, this baseline outcome critically depends on a significant improvement in political stability and favorable weather conditions.2

Figure 1.7.
Figure 1.7.

Global Outlook

(Real GDP; percent change from four quarters earlier)

After weakening from late 2002, the global recovery is expected to resume in the second half of 2003, led by the United States.

Sources: Haver Analytics; and IMF staff estimates.1 Australia, Canada, Denmark, euro area, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States.2 Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.3 Indonesia, Malaysia, the Philippines, and Thailand.4 Czech Republic, Hungary, Israel, Pakistan, Poland, Russia, South Africa, and Turkey.5 Argentina, Brazil, Chile. Colombia, Mexico, Peru, and Venezuela.
Table 1.3.

Advanced Economies: Real GDP, Consumer Prices, and Unemployment

(Annual percent change and percent of labor force)

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Based on Eurostat’s harmonized index of consumer prices.

Consumer prices are based on the retail price index excluding mortgage interest.

Consumer prices excluding interest rate components.

Inflationary pressures remain very low. In advanced countries, inflation is projected to be below 2 percent in 2003 for the second year in succession and to fall to 1.3 percent in 2004, the lowest level for 30 years; inflation in developing countries is expected to fall to 5 percent, also a historical low. Against this background, and given the weakness of the global recovery, the possibility of deflation has attracted increased attention.3 Recently, there has been overt deflation in only a few countries, most importantly Japan; however, inflation in a number of advanced countries is projected at below 1 percent in 2004, uncomfortably close to zero (especially given the general upward bias to measured inflation). The risk of a global deflationary spiral appears remote, and inflationary expectations have recently edged up, reflecting increasing expectations of recovery and recent policy measures. However, in an environment of low inflation, the possibility of a temporary period of price declines in the event of an adverse shock remains significant in a number of countries, most importantly Germany, adding to arguments for maintaining a relatively accommodative monetary stance.

While the baseline forecast for global growth is little changed from a few months ago, the balance of risks has improved significantly. Given the quick end to the war, the likelihood of worstcase scenarios has been much reduced since the last World Economic Outlook, while policies have been further eased. Indeed, as recent developments in financial markets underscore, it is possible that growth may pick up more quickly than currently expected, particularly in the United States, where productivity growth has been most robust, corporate balance sheet restructuring appears most advanced, and the policy stimulus in the pipeline is particularly large (and, given the expected supplementary budget to finance expenditures in Iraq and Afghanistan, is likely to increase further). While stronger U.S. growth would, of course, benefit the rest of the world, it would come at the cost of exacerbating the already large U.S. current account deficit, underscoring the need to accelerate implementation of measures to reduce the associated medium-term risks, as discussed below. The possibility that oil prices could be lower than expected in 2004 and beyond is also a potential upside risk to global activity.

At the same time, however, downside risks remain, particularly in 2004 and beyond. While geopolitical risks have declined since April they are far from eliminated, as recent tragic events in a number of countries underscore. In addition, beyond the specific risks in Japan, and to a lesser extent Germany, key concerns include the following:

  • The current account imbalances in the global economy and, associated with that, the continued dependence of the world on the outlook for the United States remain a serious concern (Table 1.4). Despite the depreciation of the U.S. dollar, the U.S. current account deficit is projected at 5 percent of GDP in 2003, falling only to 4 percent of GDP by 2008, suggesting that further adjustment will be needed to achieve medium-term sustainability. While the extent, nature, and timing of further dollar adjustment is impossible to predict, history suggests that even an orderly adjustment is likely to be associated with a slowdown in U.S. growth—and, if growth in the rest of the world remains weak, in global growth as well.4 In addition, a disorderly adjustment—or overshooting—remains an important risk, particularly if the offsetting appreciation continues to be concentrated on a few currencies. Volatility among the major currencies—often associated with currency misalignment—could also be a cause for concern, particularly for developing countries with fixed exchange rates or significant mismatches between the currency structure of trade and external debt (see the third essay in Chapter II, “Is G-3 Exchange Rate Volatility a Serious Concern for Developing Countries?”).

  • The recent pickup in investment may not prove enduring, depending in part on the extent to which aftereffects of the bubble persist. Apart from the direct costs, a more prolonged period of slower growth would make the global economy more vulnerable to new adverse shocks, especially given the still heavy dependence on developments in the United States, the relatively low level of inflation in some countries, and the increasingly limited room for policy maneuver in many countries.

  • In financial markets, as noted in the September Global Financial Stability Report, a further sharp rise in bond yields could adversely affect the recovery, particularly if that were not driven by expectations of higher growth. This would be especially so in countries where house prices have risen sharply in recent years (notably the United Kingdom, Australia, Ireland, the Netherlands, and to a lesser extent the United States), where such an eventuality would reduce the support that is presently being provided to demand in most of these countries and could increase the risk of a housing bust. In addition, if growth and corporate earnings were to disappoint, the recent rise in equity markets could prove ephemeral, putting renewed pressure on household, corporate, and financial balance sheets.

  • In emerging markets, the recent improvement in financing conditions owes much to temporary cyclical factors and could be reversed if industrial country interest rates were to rise rapidly. This underscores the need to use the current relatively benign financing conditions to press ahead with measures to address significant medium-term vulnerabilities. In this connection, public sector debt in emerging markets, on average now higher as a percentage of GDP than in industrial countries, is a serious concern, and in many cases is well above the level that would be sustainable if countries do not improve on historical growth and budgetary performance (see Chapter III, “Public Debt Sustainability in Emerging Markets”). Overall, there are increasing signs that the expected pickup in global activity is developing, although it is as yet unclear how broadbased and robust it will be. Against this background, and with inflationary pressures very moderate, macroeconomic policies need to remain supportive. At the same time, policymakers face major medium-term challenges: to reduce the dependence of global growth on the United States; to foster an orderly reduction in global imbalances; and to strengthen medium-term fiscal positions, especially in view of future pressures from aging populations. In general, monetary policy remains the short-term instrument of choice, and while sustained low policy interest rates run some risk of exacerbating some imbalances—notably in the housing market—these must be balanced against the need to support the recovery and reduce potential deflationary risks. On the fiscal side, with many countries facing substantial medium-term pressures, difficult trade-offs need to be made. In general, the automatic stabilizers should be allowed to operate; beyond that, much depends on country-specific circumstances and constraints, as well as the conjunctural situation. A slower pace of short-term consolidation—or even underlying budgetary deterioration—is clearly of less concern if accompanied by credible plans for future consolidation, by structural reforms to boost future growth, or—perhaps most importantly—by measures to address the future costs of aging populations (the latter having the advantage of having only a limited short-term impact on demand).

Table 1.4.

Selected Economies: Current Account Positions

(Percent of GDP)

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Calculated as the sum of the balances of individual euro area countries.

Corrected for reporting discrepancies in intra-area transactions.

Against this background, the main policy priorities would appear to be the following.

  • In industrial countries, monetary policies need to remain accommodative. In the United States, the federal funds rate is now at the lowest level in 40 years. Even so, given the continued sluggishness of activity, and the potential risks of deflation, the Federal Reserve has appropriately indicated that rates could remain low for a considerable period. Fiscal policy has provided support to demand, but at the cost of a serious deterioration in the long-run outlook; consequently, there is now a pressing need for a credible medium-term framework to restore balance (excluding Social Security) and put Social Security and Medicare on a sound footing (Table 1.5). In the euro area, where inflationary pressures have declined amid weak activity and the appreciation of the euro, the ECB’s 50-basis-point reduction in interest rates in June was welcome. Further easing will be needed if inflation threatens to undershoot significantly: for instance, if activity fails to pick up quickly or the euro appreciates significantly. In the larger European countries, medium-term fiscal consolidation remains a priority. In these cases, underlying adjustment of 1½ percent of GDP a year or, where underpinned by tangible and credible quality consolidation measures and structural reform efforts, cumulative adjustment of 1½ percent of GDP over 2004-06 would appear to provide scope for a reasonable compromise between short- and medium-term policy trade-offs. Automatic stabilizers should be allowed to operate fully around the consolidation path, even if that results in breaches of the 3 percent of GDP deficit limit. In Japan, despite stronger-than-expected recent data, a much more aggressive monetary policy—accompanied by a clear communication strategy and a commitment to end deflation in a short period—remains essential to turn around deflationary expectations. Given the very high public deficit and debt, modest structural fiscal consolidation appears appropriate. In almost all industrial countries, additional pension and health sector reform is essential to address the future pressures from aging populations.

  • In emerging markets, the policy priorities vary widely across regions. In Latin America, recent currency appreciation has increased the room for monetary easing in some countries, but—notwithstanding the improvement in financing conditions—it will be critical to ensure that the pace of fiscal consolidation and structural reform is sustained. In Asia, the scope for policy maneuver is greater, and macroeconomic policies have appropriately been eased in a number of countries, in part to offset the impact of SARS. As discussed in Chapter III, in many emerging and developing countries a broad-based effort to improve medium-term public debt sustainability—encompassing tax reforms, improved expenditure control, institutional strengthening, and structural reforms to boost growth—is a central priority.

  • Given the continued need to reduce global dependence on growth in the United States and address global imbalances, the case for structural reform takes on new urgency. As has been discussed many times in the World Economic Outlook, the priorities include labor and product market reforms to boost potential growth in Europe; corporate and financial restructuring in Japan; a greater reliance on domestic demand in emerging markets in Asia, again supported by continued corporate and financial sector reform; and in the United States, measures to boost national savings, particularly through strengthening the medium-term fiscal position. Over the past several years, progress has unfortunately been limited, and in some aspects—notably the U.S. fiscal outlook—the situation has deteriorated. In marked contrast to the situation in the mid1980s, when the United States last ran a current account deficit of this size, neither Japan nor, to a lesser extent, Europe is well placed to pick up the slack if growth in the United States were to slow. This underscores the need for accelerated efforts to address the issues listed above. In this connection, the recent initiatives in Europe—especially Agenda 2010 in Germany and the recent pension reform in France—are encouraging, although there is much further to go. In many countries, continued efforts to strengthen corporate governance are also required.

  • Policymakers will need to stand ready to manage the effects of a further depreciation in the U.S. dollar, if it were to occur. To date, the brunt of the adjustment to the depreciation of the dollar has been borne by the euro, the Canadian dollar, and a number of smaller industrial country currencies. As discussed in Box 1.1, this has been broadly in line with medium-term fundamentals, and in most cases there has been scope for offsetting monetary easing. Were the U.S. dollar to depreciate significantly further, most of these countries still have some room for policy action; however, with the degree of undervaluation much less than before, it would be desirable for the necessary currency appreciation to be spread more broadly. The critical need for a more aggressive monetary policy to address deflation in Japan implies, if anything, some downward pressure on the yen. In these circumstances, greater upward exchange rate flexibility in emerging markets in Asia—which is relatively well placed from a cyclical perspective—would significantly facilitate the global adjustment process, given the region’s importance in global trade, as well as being desirable for domestic reasons (Chapter II).

Table 1.5.

Major Advanced Economies: General Government Fiscal Balances and Debt1

(Percent of GDP)

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Note: The methodology and specific assumptions for each country are discussed in Box A1 in the Statistical Appendix.

Debt data refer to end of year. Debt data are not always comparable across countries. For example, the Canadian data include the unfunded component of government employee pension liabilities, which amounted to nearly 18 percent of GDP in 2001.

Percent of potential GDP.

Data before 1990 refer to west Germany. For net debt, the first column refers to 1988-94. Beginning in 1995, the debt and debt-service obligations of the Treuhandanstalt (and of various other agencies) were taken over by general government. This debt is equivalent to 8 percent of GDP, and the associated debt service, to ½ to 1 percent of GDP.

Excludes one-off receipts from the sale of mobile telephone licenses (the equivalent of 2.5 percent of GDP in 2000 for Germany, 0.1 percent of GDP in 2001 and 2002 for France, 1.2 percent of GDP in 2000 for Italy, and 2.4 percent of GDP in 2000 for the United Kingdom). Also excludes one-off receipts from sizable asset transactions.