The World Economy

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Section I. Recent economic developments

Global demand has risen significantly this year, with GDP growth projected to have accelerated to 4 3/4 per cent per annum (on a purchasing power parity basis) from 3 1/2 per cent per annum last year and 2 1/2 per cent in 1998. This will be the fastest rate of global growth seen since 1984. These peaks in the rate of global economic expansion coincide with those for growth in the United States, indicating the extent to which the world economy depends on the health of the American economy. Virtually all economies are likely to enjoy faster growth this year than in 1999, as indicated by Chart 1. Output growth in the OECD is projected to have accelerated from 3 per cent last year to between 4 1/4-4 1/2 per cent this year. Growth in the non-OECD countries is projected to have accelerated from 3 3/4 per cent last year to between 5-5 1/4 per cent this year. [1] The growth of world merchandise trade volumes is estimated to be over 12 per cent this year, more than twice the rate seen in 1998 and 1999.

The principal factor behind the recent buoyant levels of activity has been the lagged effects of the global relaxation in monetary policy in the aftermath of the emerging markets crises in 1997-98. This acted to prevent a financial collapse, and also raised liquidity and sentiment significantly. Strong growth in equity markets also helped to ease financial conditions further. The global economy has also continued to benefit from the rapid expansion in domestic demand in both the United States and Canada, led by double-digit rates of growth in business investment expenditure. Despite the record longevity of the present economic cycle in the United States, economic growth is projected to be around 5 1/4 per cent this year, with the acceleration from 1999 accounting for approximately one-fifth of the overall acceleration in world economic growth this year.

Buoyant external demand, along with lower real exchange rates and higher commodity prices have acted to encourage strong cyclical upturns in Asia, and more recently Brazil and Russia. Growth in Asia (including Japan) is projected to reach 6 1/4 per cent this year, in line with the average growth rate achieved in the first half of the 1990s. In Japan itself the manufacturing sector appears to have recovered, but the non-manufacturing sector remains subdued and GDP growth is likely to continue to disappoint, at around 1 1/2 per cent this year and 2 per cent in 2001. The Euro Area economies are however enjoying a significant recovery, led by strong external demand as a result of the weak euro, with growth projected to be 3.6 per cent per annum this year and 3 1/4 per cent in 2001. Looking ahead, all the forces that have recently acted to support global activity appear likely to moderate and we expect growth to slow, particularly in the industrialised economies. Short-term interest rates have been raised by 2 1/4 percentage points in the Euro Area since last November and by 1 3/4 percentage points in the US since the summer of 1999. Even in Japan, where there has yet to be clear evidence of a lasting economic recovery and price deflation is continuing, the Bank of Japan has recently ended its zero interest rate policy. Given the lags with which monetary policy operates, the full impact of these changes will emerge only over the course of the next year. The combination of the rise in oil prices and the recent weakening of global equity markets will, if sustained, also act to slow growth significantly, especially in North America. Global GDP growth is projected to moderate to around 4 per cent per annum next year and 3 3/4 per cent in 2002. The deceleration next year is entirely accounted for by developments within the OECD, but is projected to spread to the developing economies by 2002.

The rise in oil prices over the past two years has a number of potentially important effects on the global economy. In the short-term it involves a significant change in regional savings and investment balances, with the oil exporting countries gaining export revenue and the (net) oil importing countries experiencing a deterioration in their trade balance. …