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

I. ECONOMIC OUTLOOK

Economic growth in the major industrial countries is expected to weakened in the rest of this year, followed by a very sluggish recovery next year. 1994 will be the fourth consecutive year in which the estimated average 2% output growth rate in the industrial countries has been below its long-term potential rate. In the first half of this year, the two year old anemic recovery in North America came to a halt, the recession in Europe deepened, and industrial activity in Japan worsened. Our short-term forecast suggests that during 1993-94, output growth in the major industrial countries will fluctuate around the 2% rate with a high probability of mini-recessions--one to two quarters of negative growth--in several economies.

In the inflation front, we forecast rates to stabilize this year followed by a modest acceleration during 1994-95. Our inflation outlook for this year reflects the current slowdown in output growth, declining oil prices and a moderation in the growth of world trade. However, we expect in the next two years inflation to start accelerating for the following reasons: (1) the introduction of new consumption taxes in order to raise revenues; (2) above inflation increases in labor costs, wages plus benefits, without important gains in productivity; and (3), most importantly, adoption of expansionary monetary policies under political pressure to "stimulate the economy" and create "new jobs."

Government deficits increase during recessions or recessionary-growth periods as income stagnation cuts revenues, and at the same time expenditures, without fiscal discipline, keep rising at long-ten or even higher rates of growth. The slow pace of economic activity in the industrial countries over the last three years, coupled with runaway spending, have resulted in large deficit-income ratios that create a constraint on the government's policy options to provide fiscal stimuli. In the United States, the Clinton fiscal package without healthcare reform, projects a moderate decline in the deficit-income ratio from 5% in 1992 to 4% in 1994 under a growth assumption that the administration has already revised downwards. The Canadian deficit-income ratio is currently high and is forecast to decline only slightly from 6.3% in 1992 to 5.7 in 1994. Provincial tax increases and fiscal retrenchment are expected to be the policies in Canada over the next two years. In Europe, fiscal policy is also expected to be restrictive due to high budget deficits. In Germany the deficit-income ratio in 1993 is estimated to reach 5.5%, which is one of the smallest in Europe. Budget deficits in Europe average above 6% of income and are expected to remain high in 1994. The European deficit-income ratios are projected to change as follows from 1993 to 1994 in the major economies: In Germany from 5.5% to 6.7%; in France from 5.9% to 5.5%; in the United Kingdom from 8.1% to 7.1%; in Italy from 10.8% to 10.1%; in Netherlands from 3.9% to 3.6%; in Belgium from 6.6% to 5.9%; in Spain from 4.6% to 4.2%; in Sweden from 13% to 12.8%. Finally, in Japan the new coalition government has proposed additional fiscal stimulus packages with further increases in social spending and tax-cuts. The combination of existing and proposed expansionary measures will widen the government's deficit from 2% of income in 1992 to 3.3% this year and 3.8% in 1994. In sum, the diverse pattern of output developments in the major countries in the last four years--with the United States leading the recessionary phase followed by Europe and then Japan--has created a similar pattern in fiscal policy. Namely, deficits increased first in the United States, are currently rising in Europe, and are expected to go up within the next two years in Japan.

Our present forecast implies that the deficit-cycle in the major industrial countries will neutralize fiscal policy in the next three to four years. Either the Maastricht criteria for economic union in Europe, which call for a 3% deficit-income ratio, or political pressures for deficit reduction--such those in the United States--are important factors in our analysis of the sustainability of fiscal policy. …

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