Thinking Globally: International Prospects for 2002: Aggregate World Real Output Appears to Have Declined toward the End of 2001 for the First Time since the Early 1980s. near the End of 2001, Data Pointed to Slowdowns and Contractions in Economic Activity in Most Areas of the World. Looking Ahead to 2002, Global Economic Growth Should Resume, but the Pace of Business Activity Will Remain Somewhat Subdued in the Short Run. (International Focus)

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Global economic growth slowed significantly during the first three quarters of 2001, and economic data from early in the fourth quarter were disappointing. As a result, the outlook for the global economy was revised downward, and private forecasters' worldwide outlook is negative for the fourth quarter of 2001 and for at least the first quarter of 2002.

Weakness persists in North America and Japan, while reports from the euro area (those European countries participating in the monetary union) indicate worse-than-anticipated performance, especially in consumer spending. Economic activity in the United Kingdom also slowed, but overall growth remained positive going into the fourth quarter of 2001.

Emerging Asian economies are weak, but there are indications that the industrial decline may be bottoming out in some areas of that region. South American activity was also disappointing, with Argentina's recession deepening and Brazilian growth coming to a standstill. Importantly, there does not appear to be significant spillover from the current Argentine financial crisis to other emerging economies.

The shock to the global economy from the Sept. 11 terrorist attacks was clearly negative. It does appear, however, that the worst direct economic effects of the attacks were concentrated in the United States. There are some concerns that the implementation of additional security along U.S. borders may have longterm effects on the flow of goods and people from outside the United States -- from Canada and Mexico in particular -- but it is too early to tell how these changes will affect economic activity in the longer term.

In the global financial markets, it appears that markets have recovered from the Sept. 11 shock. But while most equity markets around the world have rebounded from their mid-September lows, few have returned to levels seen earlier in 2001.

International trade has also suffered. Trade volumes worldwide did not grow much in 2001 as demand for goods and services around the globe slowed significantly. A decline in industrial goods prices also led to a decline in the value of traded goods. In the United States, both import and export growth fell in 2001. The recession-induced import decline has led to a modest improvement in the overall U.S. trade balance, but poor demand for U.S. goods abroad, a result of decelerating activity in U.S. trade partners, has limited this improvement. (See the international trade sidebar on page 28.) Trade should pick up in 2002 as the global economy begins to recover.

The current consensus forecast for worldwide economic growth as measured by real gross domestic product (GDP) in 2002 is about 1.3 percent. This figure follows an estimated rate of global growth of approximately 1.2 percent in 2001 (see the table).

On a quarter-by-quarter basis, the global economy grew modestly in the first quarter of 2001, flattened out in the second quarter and is estimated to have entered negative territory in the third quarter of the year. While GDP should continue to decline in the beginning of 2002, the global economy should gather momentum during the year (see chart 1).

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To provide perspective on the global economy, a review and outlook of economic activity for the United States' major trading partners is useful.

U.S. economic recovery key to North American trading partners

The Canadian and Mexican economies are closely tied to the United States through trade, and the decline in U.S. economic activity has taken its toll on the economies of its NAFTA partners. Exports to the United States account for roughly one-third of Canada's economy and one-quarter of Mexico's.

Mexico was in recession throughout 2001, in part because of the downturn in U.S. industrial activity. Much of Mexico's rapidly growing industrial base is geared toward supplying U.S. manufacturing industries. …