Academic journal article The Journal of Business Forecasting Methods & Systems

International Economic Outlook

Academic journal article The Journal of Business Forecasting Methods & Systems

International Economic Outlook

Article excerpt

A RATCHETING UP IN GLOBAL INFLATION

I. Economic Outlook

The world economy continues its gradual recovery with total output increasing 3.5% in 1994, compared with 2.3% in 1993 and 1.8% in 1992. In the industrial countries, economic growth has strengthened during 1994, as the economies of continental Europe and Japan have entered the recovery stages of their business cycle. For the OECD industrial countries as a group, output is projected to expand by 2.8% in 1994 and by 3.4% in 1995, after an average growth rate of little more than 1% a year during 1991-1993. The robust economic growth of the developing countries has been the most important characteristic of global economic trends in this decade. Total output in the developing world is projected to continue to advance at an average annual rate of 5.8% during 1994-95 from 6.1% in 1993 and 5.9% in 1992.

Another important characteristic of global economic developments in the nineties has been the growth and directions of international trade. The growth in world trade volume, which slowed to 2.4% in 1993 from 4.5% in 1992, is forecast to average an annual rate of about 6% during 1994-95. However, last year, growth in developing countries imports accounted for almost all the growth in world trade. Furthermore, industrial countries' import growth rates in 1994-95 are projected to be about 65% of the growth rates of developing countries' imports. These global economic and trade trends strongly demonstrate that the economic performance of developing countries is no longer so dependent on the industrial countries economic growth. Consequently, economic growth in the developing world could result to an export-led recovery and growth in the industrial countries. Given these new dynamic economic developments in the world economy during 1994-95, our global forecast projects gradually accelerating inflation rates in the industrial countries for the following reasons:

* First, the projected to continue strong growth in the developing countries and the expected recovery in the industrial countries would result in an increased global demand. Last year, growth in the developing world exceeded 6% against about 1% in the industrial world. In 1994-95 the developing countries are projected to register about 5.8% output growth, while the growth rates in the major industrial countries are improving and it is forecast their economies to expand as a group by 3.4% in 1995. According to recently released statistics, the annualized rate of real economic growth in the first quarter of 1994 was 3.8% in the United States, 4.2% in Canada, 3.9% in Japan, 3.6% in the United Kingdom, 2.2% in Germany, 1.9% in France and 0.3% in Italy.

* Second, an increase in global inflation is bound to accompany the increased global demand reflecting a reversal of the downward trend seen in recent years. In the developing countries, inflation averaged about 42% per year during 1992-93, when the economies were expanding at an annual rate of 6%. Looking at the major developing countries in 1993, consumer prices increased by 13% in China, 9.9% in India, 4.8% in Korea, 2.9% in Taiwan, 8.5% in Hong-Kong, 9.5% in South Africa, and 9.8% in Mexico. In the industrial countries, the weakness of economic activity in the last three years reduced inflation from 4.5% in 1991 to 3.3% in 1992 and 2.9% in 1993. Recently released statistics point out to an end of declining inflation rates in the industrial countries. During the twelve months ending in July 1994 consumer prices advanced 2.8% in the United States, 2.9% in Germany and 0.6% in Japan. Therefore, the strengthening of growth in the industrial "low-inflation" countries coupled with a continuation of robust growth in the developing "high-inflation" countries is expected to result in an overall accelerating global inflation rates in 1994-95.

* Third, the commodity prices boom. Commodity prices surged since the beginning of this year. Based on recent statistics, the Economist's industrial index went up 36% over a year ago, the internationally watched HWWA index of the German Hamburg Institute increased by 15%, while the U. …

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