Academic journal article National Institute Economic Review

The World Economy

Academic journal article National Institute Economic Review

The World Economy

Article excerpt

* The most likely outlook for the world economy in 1999 is a marked slowdown, with growth slackening in the OECD from 2.4 to 1.8 per cent.

* But there is also a high probability that further shocks to financial markets could induce a full blown recession in the US and a substantial reduction in European growth.

* Sharp and swift cuts in interest rates are needed to avert this danger.

* The ECB could cut rates by half a percentage point without compromising its inflation goals.

The forecast for the world economy is, unusually, bimodal. The most probable outcome is for a pronounced deceleration, as American growth more than halves and Japan stagnates. But there is also a high likelihood of a more serious reverse to global activity if there are further shocks to financial markets.

Under the more favourable scenario - the baseline forecast - the world economy is sustained by continuing expansion in Europe and the US. Even on this basis, the US is poised to slow down sharply in 1999 with GDP expanding by 1.5 per cent compared with 3.4 per cent in 1998. Net exports will clip output growth by 1 per cent and consumer spending and investment will no longer prop up the economy as in 1998.

However, under the alternative scenario, further shocks to financial markets precipitate a much graver setback to the world economy. …

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