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Part II: The Outlook for the International Economy
After a solid pick-up in 1999, world economic growth is expected to increase further in 2000 and 2001 to rates above the long-term average.
Supported by continuing strong economic growth in the United States (US) and a rebound in activity in non-Japan East Asia, which was larger and sooner than expected, the world economy grew by 3.3 per cent in 1999, after growth of 2.5 per cent in 1998. World growth is expected to strengthen further in 2000 to 4¼ per cent, with another year of strong growth in the US, improvement in Japan and Europe and continued solid growth in non-Japan East Asia. For 2001, while growth is expected to slow in the US, the momentum in other major economies is expected to continue. Overall, world growth is projected to moderate slightly to 3¾ per cent in 2001 - towards longer-term trend growth.
Chart 1: World GDP Growth Rates(a)
(a) World GDP growth rates are calculated using GDP weights based on purchasing power parity.
Source: Various national statistical publications, International Monetary Fund (IMF) and Treasury.
World inflation is expected to remain benign, despite the improving outlook for world economic activity. While the sharp increase in oil prices had raised some concerns about the outlook for inflation in the world economy, these concerns have dissipated somewhat following the late March agreement by the Organisation of Petroleum Exporting Countries to increase production of oil.
Table 2: GDP Growth Rates for Selected Countries and Groupings(a)
(a) Growth rates for World, Total Organisation for Economic Co-operation and Development (OECD), European Union (EU), and non-Japan East Asia are calculated using GDP weights based on purchasing power parity.
(b) Treasury estimates for World, total OECD, and European Union growth rates.
(c) Total OECD comprises the United States, Japan, Germany, France, Italy, the United Kingdom, Canada, Australia, Austria, Belgium, the Czech Republic, Denmark, Finland, Greece, Hungary, Iceland, Ireland, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and Turkey.
(d) Non-Japan East Asia consists of Korea, Singapore, Taiwan, Hong Kong, China, Indonesia, Malaysia, Thailand, and the Philippines.
Source: Various national statistical publications, IMF and Treasury.
In 1999, the United States maintained the strong momentum of recent years, with growth accelerating over the second half of the year. This continued strength has seen the US achieve its longest economic expansion on record. As a result, the unemployment rate has fallen to around 4 per cent, the lowest level since the early 1970s.
Robust employment and wages growth have supported incomes, while historically high levels of consumer confidence and stock market wealth effects have further fuelled growth in private consumption expenditure in excess of income growth. Growth in investment has also remained strong in response to the strength in domestic and external demand.
An important factor supporting the duration and strength of the US expansion, with relatively subdued inflation, has been the positive supply-side influence from high productivity growth. It appears likely that this improvement is not purely a cyclical phenomenon, and that potential growth in the US has risen above 3 per cent.
The outlook for 2000 is for growth to average around 4¼ per cent, although slowing somewhat in late 2000 and moderating further in 2001 with growth in that year projected to average around 3 per cent. A moderate slowing in consumption growth is anticipated, driven in part by slowing but still robust growth in employment and real disposable income. Strong, albeit moderating, domestic demand, coupled with further growth in export demand, should see high levels of business investment continue.
While inflation is not expected to increase significantly, it represents a risk to the outlook if a stronger monetary policy response is required to promote a more sustainable level of growth. There are also downside risks arising from uncertainties about the movements in asset prices and the effects of sustained falls in these on consumption and investment. On the upside, improvements in productivity could see strong growth in the US continue.
Japan is expected to grow a little more quickly in 2000, after recovering from a contraction of 2.5 per cent in 1998 to grow by 0.3 per cent in 1999. Growth in Japan is expected to be underpinned by supportive fiscal policy, complemented by a gradual pick-up in private capital spending over 2000 and 2001. By contrast, private consumption expenditure is expected to remain weak until employment and household incomes start to grow sustainably. Uncertainties about Japan's future pension incomes and medical care costs are also expected to continue to dampen consumption. In the light of the strong yen since late 1998, export growth is expected to continue to be balanced by strong import growth, resulting in a negligible net contribution to growth from the external sector. Overall, growth is expected to increase to 1¼ per cent in 2000 and 1½ per cent in 2001.
The scope for ongoing fiscal stimulus is limited. Further progress on various structural reforms, especially in the financial and corporate sectors, is needed for Japan to achieve a more broadly-based and sustained economic recovery in the medium term.
Growth in the European Union (EU) strengthened over the latter half of 1999, following slower growth earlier in the year, in part due to weakness in domestic demand in some of the larger economies and also weaker export demand reflecting the financial and economic instability in emerging market economies. Improved domestic demand growth provided the early stimulus, with a steady increase in external demand broadening the recovery. Growth in the EU is expected to increase to 3¼ per cent in 2000, moderating to 3 per cent in 2001, with support likely to come from improved business sentiment and industrial production, along with falling unemployment and a competitive euro. The improved world outlook will also underpin export growth in the region.
Growth in the three major euro economies is expected to converge somewhat in 2000 and 2001, as growth in Germany and Italy improves from the relative sluggishness of 1999 and the strong growth in France moderates slightly. The recent high level of activity in the United Kingdom is expected to ease.
While the outlook for the European Union is positive and core inflation (which excludes energy prices) has been low for a considerable time, the main risk to the region could be a sharp rise in wage and price pressures, as growth gathers strength in the larger economies, leading to a stronger than expected monetary policy response. To sustain higher rates of non-inflationary growth and reduce unemployment in the region, greater flexibility in labour and product markets is needed.
Growth in non-Japan East Asia rebounded strongly in 1999, after recording only modest growth of 1.6 per cent in 1998. The turnaround in 1999 occurred in all of the crisis-affected economies, and in some cases - notably Korea, Malaysia and Thailand - the turnaround was sharp (albeit from low bases). Even Indonesia, which suffered the deepest recession, returned to modest positive growth in 1999. Strong external demand, especially from the US, and supportive macroeconomic policies across the region have assisted in the turnaround in growth.
Chart 2: Economic Growth in Selected Major Trading Partners (MTP)
(a) Other East Asian MTP comprises Korea, Singapore, Taiwan, Hong Kong, Indonesia, Malaysia, Thailand, and the Philippines. GDP weights are based on purchasing power parity.
Source: Various national statistical publications, IMF and Treasury.
For 2000 and 2001, improving consumer and business confidence is expected to broaden the base of the recovery to include an increased contribution from domestic demand. Strong external demand (on the back of growth in the world economy and in the Asian region itself) is expected to continue. It is also expected that fiscal policies will remain supportive of growth. Overall, the region is expected to grow by 6½ per cent in 2000 and 6 per cent in 2001.
Longer-term prospects in Asia depend on the timely and effective implementation of further fundamental reforms, especially in the areas of financial and corporate restructuring, the soundness of the legal and governance systems and the transparency of domestic policies.
Prospects for emerging market economies have improved considerably, following the difficulties experienced in 1999. Solid recoveries are expected, particularly across most of Latin America and Russia, but vulnerabilities remain. Domestic demand is expected to continue to gather strength, and the external stimulus provided by stronger world growth, competitive exchange rates, and the rise in commodity prices (particularly energy and metal prices) should also help underpin a sustainable recovery. This will be supported by efforts to improve budget positions and strengthen public sector governance, although broader institutional and structural reforms are still needed.