Growth Accelerates in the EU, Sags in the USA and Continues to Lag Behind in Japan. Mid-term Projection for the Global Economy up to 2004
The sustained U.S. stock market boom of the 1990s fuelled private consumption in the USA to an extent that it grew at a substantially faster rate than the country's GDP (in 1999, the savings-ratio of private households actually turned negative). At the same time, the gap between the share price-based value of companies and their value based on balance sheet data widened: between 1989 and 1999 the share value of corporate business in the USA rose by 326 percent, while its real capital stock grew by just 50 percent. The (excessively) high valuation of U.S. shares makes it unlikely that their prices will continue to rise as in the past years. The projection therefore assumes that prices will be subject to "adjustments" over the next two years, which will put a damper on consumption and thus on growth. The slowdown will, however, be muted, for three reasons: some relaxation of the monetary reins will boost real investment demand; declining dollar interest rates, combined with the high current account deficit in the USA, will cause some depreciation of the dollar; and, lastly, fiscal policy will respond to the muted growth by sending expansive signals. After slowing down in 2001, growth in the USA will recover its pace and remain at 2.5 percent throughout the forecast period. In the EU, the upswing will continue, and growth should reach 2.8 percent and 3.0 percent in 2000 and 2001, respectively. It is assumed that the momentum achieved by exports will also heat up internal demand (assuming further that the ECB will refrain from any marked rise in euro interest rates). After some cyclical downturn in 2002-2003, the EU growth rate should be back at 2.5 percent by 2004. Throughout the forecast period, EU countries will see their economies expand by 2.6 percent p.a. on average, i.e., significantly faster than in the 1990s. The Japanese economy is expected to take time over its recovery and it should grow by just 2.1 percent p.a. up to 2004. Altogether, the industrialised countries will raise their GDPs by 2.4 percent p.a. over the next five years. Oil prices will decline from 25 $ to 21 $ per barrel in 2000. Subsequently, oil exporters should be able to avoid a substantial oil glut and attendant collapse of prices as happened in 1997-98. Oil prices will average 22 $ throughout the forecast period, which is higher by 26 percent than the average of the past 15 years. The lower dollar exchange rate and global economic upturn will make for a rise in dollar prices for manufactured goods and raw materials other than oil. Altogether, world trade prices should increase by 2.9 percent p.a. up to 2004. Assuming an average Eurodollar interest rate of 4.6 percent, international dollar debts will bear just 1.7 percent in real interest in 2000-2004 (in 1997-98, declining world trade prices boosted the real interest rate to over 11 percent, which played a major role in the eruption of international financial crises). With raw material prices recovering and the costs of financing their foreign debt declining, developing countries and former communist countries will be able to raise their imports substantially. Higher oil prices will enable oil exporters to expand their demand for particularly strongly imports (+10.4 percent p.a.). Other developing countries should be able to increase their imports by 8.5 percent, and Eastern European countries by 8.3 percent. Imports into industrialised countries, on the other hand, will grow by just 5.7 percent, due mainly to a marked deterioration of their terms of trade. Given these conditions, the global trade volume will expand by 6.6 percent p.a. in 2000-2004. GDP will grow by 3.5 percent p.a. in the oil-exporting countries, by 6.0 percent in other developing countries and by 3.9 percent in the former communist countries of Eastern Europe. The global economy in general would thus expand by 4.0 percent annually in 2000-2004, i.e., at a noticeably faster pace than in the 1990s.
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