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

GLOBAL RECOVERY ON TRACK

I. Global Assessment and Outlook

Despite a weakening of business activity in several industrial countries in the second half of 2002, the global economic recovery is on track and is expected to be sustained over the forecast horizon by fiscal and monetary stimuli as well as resurgence in international trade.

There is now evidence that the global slowdown, which began in the middle of 2000, has not been more moderate than previous downturns - as originally was estimated - and it qualifies as a fullfledged global recession.

In the case of individual countries, a national recession is defined by either the conventional rule of thumb of two straight quarters of negative GDP growth, or by a sophisticated analysis of key monthly indicators that decline significantly more than a few months - a methodology followed by the National Bureau of Economic Research (NBER) in the United States. Unfortunately, these recession-- dating rules do not apply well to the global context as quarterly or monthly worldwide aggregates are very weak or unavailable. On an annual basis, global output has not declined in the past 30 years.

A simple benchmark for identifying slowdowns that could be labeled as global recessions - proposed in the past by the International Monetary Fund (IMF) - is to adjust world output growth for growth in world population. According to this cycle dating technique, we could declare that a sufficient, although not necessary, condition for a global recession is any year in which world per capita growth is negative.

The 2001 global slowdown has met the hurdle of negative per capita annual GDP growth. Global per capita GDP growth - the best measure of the impact on global welfare - fell below zero in 2001. The 2001 fall was similar to the troughs that the global economy experienced in the last three major worldwide recessions, 1974-5, 1982, and 1991 (See Chart 1).

The international economic landscape changed on December 13, 2002 in Copenhagen, where the European Council of Heads of State or Government of the European Union agreed on financial terms to bring 10 more countries into the 15nation economic bloc by 2004. Accession of 10 new member states - Latvia, Lithuania, Estonia, Poland, Hungary, the Czech Republic, Slovakia, Slovenia and the Mediterranean islands of Cyprus and Malta - has important implications on global economic growth and the volume of international trade. The enlarged 25 member European Union (EU-25) will be the largest single market in the world by population with 444 million consumers, compared to the North American Free Trade Agreement (NAFTA)'s 416 million consumers, a bloc comprising the United States, Canada and Mexico.

Our global model has incorporated the new economic linkages and expands to 25 member countries the European Union by adding the special group of the10 acceding countries to the previous roster of 15 members. According to Table 1, NAFTA is still the largest single market in the world in terms of economic size with an estimated $11.8 trillion GDP in 2002. By comparison, the market size of the enlarged European Union (EU-25) is estimated to have reached $8.9 trillion in 2002, about three-fourths of NAFTA.

In our central forecast, global output - a worldwide composite of 57 countries that count 96 percent of world's output using as weights GDP converted to U.S. dollars at market exchange rates - is projected to grow by 2.8 percent in 2003 and by 3.3 percent in 2004, following growth rates of 1.1 percent in 2001 and 1.9 percent in 2002. Given the relative economic size and expected growth in each of the major regional blocs, the forecast projects NAFTA to contribute 40 percent to global economic growth in 2003, making again the United States - economic leader of the bloc - the global engine of growth. The contribution of the countries in Asia and the Pacific Rim region to worldwide output growth is projected to be 30 percent, leaving 30 percent contribution to global growth for the rest of the countries. …

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