World Economic Outlook, 1998-99

Abstract

The troubles in South East Asia will undoubtedly have a negative impact on the world economy. Although the troubles will be severe in the South East Asian economies themselves, at present it seems unlikely that they will be large enough to provoke a global crisis. The countries embroiled in the currency crisis account for a relatively small proportion of world output and trade, and economic growth in the rest of the world seems to have gained sufficient momentum to withstand the shock. World output (measured in purchasing power party terms) still seems to be on course to expand at a rate of around 3.5% in both 1997 and 1998, with upward revisions to the growth projections for North America, Western Europe and Latin America offsetting a weaker performance in Japan and developing Asia. Economic growth in North America has been somewhat stronger than expected, with the prolonged upturn in the US maintaining a robust pace and the upswing in Canada continuing to gatherspeed. An upward drift in inflation over the next twelve months is expected to induce the Fed to raise interest rates again, to slow economic growth to a more sustainable 2.3% -2.5% pace from 1998-2002, after a strong 3.6% gain in 1997. In Japan, the impact of the fiscal tightening appears to be more severe and lasting longer than was originally anticipated. We still expect a gradual recovery in activity as the fiscal drag diminishes, with real GDP growth forecast to rise from only 0.8% this year to 1.9% in 1998. However, there is a risk that the support to the recovery from net exports wil fal short of expectations if there is a more severe and sustained slowdown in developing Asia. The export-ed recovery in continental Europe seems to be picking up steam, and the strength in exports has started to spread into domestic demand. The domestic demand driven UK economy continues to expand at a robust rate. Real GDP growth in Western Europe as a whole is forecast to improve from an estimated 2.5% this year to an upwardly revised 2.7% in 1998, with a more broadly based upswing in mainland Europe more than compensating fora policy-induced slowdown in the UK. Latin America, like the Pacific Basin, has several economies with current account deficits and strong currencies. Butthe recovery in the largest Latin American economies from the 1994-95 recessions has not lasted long enough to generate deficits much above 3% of GDP. Moreover, none of these countries have accumulated big private local currency lending in real estate and other non-traded goods sectors. Nonetheless, we expect Latin America's major economies --except Mexico --to slow growth next year in order to stabilize their trade deficits.