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

1. The Long-Term Global Outlook

The baseline long-term forecast for the world economy through 2008 points to continuation of growth with a risk of a global recession at the beginning of the new century. The world's output is expected to grow at an average annual rate of 2.7% during the forecast period, 1999-2008, which is below the long-term trend rate of global output and our projection published last year. This marginal change in the overall growth in the world economy reflects an expected strengthening of growth in the European economies, Japan's current upswing, a recovery in Asia, and an improved performance in Latin America. The long-term outlook is for greater convergence in both economic growth and, especially, in inflation across regions and economic areas which are at different levels of development.

The long-term projections of the baseline forecast for selected global economic, business, and financial key indicators to the year 2008 are presented in Tables 4 and 5. Countries have been classified according to the guidelines introduced by the International Monetary Fund two years ago. The newly industrialized Asian economies of Hong Kong, Korea, Singapore and Taiwan, as well as Israel are now considered together with the group of countries traditionally known as industrial countries. The expanded group is labeled the "advanced economies" in recognition of the declining share of employment in manufacturing, common to all of these economies. The long-term scenario is based on the following developments regarding policies as well as trends in structural and supply factors in the global economy:

Fiscal Policy. Strong economic growth in the United States and consolidation of fiscal policy in Europe has led to significant reduction in budget deficits and produced significant surpluses. Political developments in the United States for increased spending on social programs instead of tax-cuts, combined with the requirement of maintaining low debt-income and deficit-income ratios for successful implementation of the monetary unification in Europe, are assessed to result in "growth-neutral" fiscal policies in the next two years. The expected slowdown in the United States economy, however, is forecast to result in deficits as the decrease in revenues will not be matched by spending cuts. In Japan, expansionary fiscal policy in the last four years has stimulated domestic demand, but the deficits and the national debt have reached unsustainable levels. The Japanese deficit-income ratio registered 8.5% in 1998 and is estimated to be around 9.4% this year. It is expected that the progress of the Japanese recovery will result in a fiscal restraint over the long-term. Fiscal restraint is also expected to contribute significantly to the economic recovery of the developing countries in the new century. The deficit-income ratio for the group of the developing countries increased from 2.3 % in 1997 to 3.6% in 1998 and is estimated to be 3.7% in 1999. In our forecast, we expect the overall deficit-income ratio for the developing countries to fall to 2.5% in the year 2000 and its decline to continue over the forecast horizon stabilizing around 1% by the year 2008. The implications of this fiscal mix in the advanced economies and in the developing world are expected to enhance financial stability and sustain economic growth in the global economy.

Monetary Policy. In the major industrial countries of the advanced economies, the so-called group of seven (G-7), the medium-term goal of price stability has been achieved. In 1998, inflation registered 1.3% in the G-7 countries, compared with 2% in 1998 and an average rate of 2.8% during 1991-97. Given this performance of monetary policy, it is anticipated that the primary objective of policy during the forecast horizon will be the safeguarding of the inflation gains made, with an additional emphasis on moderation of economic growth for maintaining existing employment levels. …

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