Covergence to Sluggish Growth in Industrial Countries

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I. ECONOMIC OUTLOOK

The major industrial countries are experiencing uneven recoveries from the global recession that began in 1990. The economic growth disparities were highly pronounced last year. The English-speaking countries that first went into recession - the United States, Canada, the United Kingdom and Australia - expanded at growth rates between 2% and 3%. In continental Europe, the major economies - Germany, France, and Italy - experienced negative output growth rates, while Japan's economy stagnated with an almost flat growth rate in output.

According to our central forecast, the economic recovery in the United States will substantially slow down, while the recoveries in Europe and Japan will be moderate. Economic growth in the United States is forecast to slip to 2% in 1995 from 2.8% this year. Output in the European Union is expected to expand 1.4% this year and 2.2% in 1995. In Japan, the economic upturn is expected to be sluggish with output increasing by 0.2% this year and 1.8% in 1995. Therefore, the current dysyndronized economic rebound in the industrial countries will end in 1995 when the recent divergences in output growth rates are expected to diminish.

In contrast to the sluggish economic outlook for the major industrial countries, developing countries are expected to lead global economic growth. The newly industrializing countries in the Pacific Rim and several Latin America nations are expected to continue to advance at an average growth rate of 5.5% during 1994-95. Consequently, world economic output is projected to increase by 2.8% this year and 3.4% in 1995, following an estimated rate of growth of 2.2% in 1993.

The gradual strengthening of world economic activity is expected to be accompanied by a strong recovery in world trade. The volume of world trade is projected to expand by 5.1% in 1994 and by 6.2% in 1995 from a 2.4% growth rate in 1993. At the same time, worldwide inflation rates are projected to accelerate during 1994-95 for the following reasons:

* Output gaps in the industrial countries will be narrowed because of the gradual economic recoveries that are underway.

* Strong growth in developing countries and acceleration of world trade are expected to result in inflation in international non-oil commodity prices.

* Oil prices are projected to slowly accelerate, which will now bring consumer inflation rates up because of the current increases in fuel taxes. Fuel tax increases were introduced in 1993 in the United States, France, the United Kingdom, Austria, Spain, Sweden. Similar taxes are introduced this year in Germany and Italy.

* Structural inflation, which results from productivity differentials between manufacturing and services as they both are expected to receive the same wage and non-wage benefit raises, is forecast to be a common contributor to overall inflation in many industrial countries, especially in the United States, Canada, Germany and France.

* Rising structural unemployment rates in Europe and Japan will influence political leaders to promote expansionary fiscal policies despite the existence of large deficits.

The findings of the second quarter of 1994 International Economic Survey of nearly 500 economic experts of transnational corporations and organizations in 66 countries conducted by the German Ifo-Institute confirm our central scenario for the world economic situation and short-term outlook. The major findings of the survey are as follows:

* For the first time since 1990 the business climate in the world economy was judged as satisfactory.

* Expectations that the world economy will continue to recover within the next two quarters have been rising.

* World trade is expected to accelerate this year particularly in Western Europe, China, India, Korea, Taiwan, Argentina and Mexico.

* Inflation is not expected to accelerate on the average in all 66 countries during the next three months. …