Stock Market Decline Dampens Economic Growth in the USA. Medium-term Projections for the World Economy until 2006
The recent stock market losses have significantly heightened the uncertainties regarding the future economic development, particularly in the USA and Europe. The present forecast is based on the assumption that the stock markets will not suffer further losses: first, compared to the peak two years ago, share prices have declined so strongly that the value of the stock companies at current prices approximates their "real" value (physical capital plus net financial assets); second, the extremely low interest level and the correspondingly high prices of bonds are likely to motivate investors to shift financial assets into relatively cheap equities; third, economic policy-makers will make every effort to calm down stock markets, given that a continuation of the downward drift of the stock markets will not only threaten the fledgling economic recovery but also the retirement system in those countries in which the old-age pension system is based to a considerable extent on the funding principle (such as in the USA). If, as assumed, the recent slide on the stock markets does not continue, the medium-term growth of the world economy will be hardly affected by the developments on the stock markets. Gross domestic product of the industrialised countries is likely to expand by 2.5 percent per year on average during the period 2001-2006, at a slightly lower pace than during the period 1995-2001. This deceleration is entirely due to a marked slowdown of economic growth in the USA. During the years from 1995 to 2001, the US economy grew particularly strongly (+3.6 percent), mostly as a result of the boom on the equity markets and the related decline in the saving rate of private households. Even though the saving rate in the USA is expected to rise again (mostly as a reaction to the losses on the stock markets), a continuation of the expansive monetary and fiscal policy (interest rates will remain below the mark of 3 percent; the budget deficit will increase significantly) and a lower dollar exchange rate will support medium-term growth at a rate of 2.9 percent per year. At a rate of 2.5 percent per year, the economy in the European Union will continue to grow more slowly than the US economy. There are three main reasons for this divergence. First, interest rates in the euro zone will exceed interest rates in the USA by 1 percentage point on average. Second, fiscal policy will continue to by restrictive, given that the budget deficits of major countries, such as Germany, Italy and France, deviate markedly from the EU's stability targets. Third, growth of EU exports will be dampened by the appreciation of the euro vis-à-vis the dollar (the restrictive economic policy stance increases the dependence of growth in the EU on exports). Japan's economy will remain sluggish as a result of the problems in the financial sector, the high exchange rate of the yen, the rise in unemployment, and the pessimistic outlook of enterprises and households; during the period 2001-2006, the economic growth rate is unlikely to exceed 1.2 percent on average. The oil-exporting countries will manage to boost their gross domestic product by 4.1 percent over this period. One of the main factors of this acceleration is the surge in oil prices, which are projected to stay at 26.7 $ per barrel during the period 2001-2006 on average. The economies of the other developing countries are expected to expand by 5.4 percent per year, with the extremely low real interest rate for dollar denominated debts (-0.4 percent) a major factor. These favourable financing conditions make the outbreak of further debt crises unlikely. The former planned economies will be able to boost economic growth (from 2.5 percent during the period 1995-2001 to 3.7 percent during the period 2001-2006), mostly as a result of shifts of production facilities from the EU to these countries in the course of the EU's eastern enlargement.
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