Academic journal article The Journal of Business Forecasting Methods & Systems

Divergence in Inflationary Expectations Destabilizes Financial Markets

Academic journal article The Journal of Business Forecasting Methods & Systems

Divergence in Inflationary Expectations Destabilizes Financial Markets

Article excerpt


In our revised forecast for the global economy, output is projected to grow by 2.2% this year and then to accelerate only modestly to 2.6% next year. This would result in an average growth in world output rate of 1.6% per year during 1990-95. The revised moderate growth in world output implies that the global economy will experience a period of six consecutive years of below-trend performance, the longest since World War II. Following an average rate of growth of 3.3% per year during 1975-84, the expansion in world output averaged 3.8% per year during 1985-89, suggesting that the projected stagnation of global economic activity is expected to result in a levelling off, or even a small increase in the unemployment rates in countries with substantial gains in productivity.

An important characteristic of the developments in world economy during the nineties has been the increased divergence of economic growth performance between regions and individual countries, which provides evidence in support of the long duration of the sharp slowing of growth in the global economy. The Asia-Pacific economies have not experienced a recession during the nineties and are projected to continue expanding at healthy growth rates this year and in 1995. After the so-called "lost-decade" of the eighties when economic sluggishness, high inflation and huge foreign debts were the major features for the region, growth in the major Latin America countries in the early nineties was impressive and stable averaging 4%, excluding Brazil. With the recovery in Brazil now under way, growth in the Latin America area is expected to be 1.5% above world output growth during 1994-95.

The European economies in transition as a group are currently in a recessionary phase. Economic activity is projected to further decline this year in the newly independent states of the former Soviet Union, with a low probability for positive growth in 1995. Following their economic transformation, however, Poland, the Czech Republic, the Slovak Republic and Hungary are expected to experience positive growth rates for the first time this year and their recovery is projected to continue in 1995. The economies of Romania and Bulgaria are expected to experience further declines in output this year as well as in 1995.

Within the OECD area, there are significant differences in the cyclical economic performance among individual countries. It is estimated that in 1993 more than one half of the 24 members of the OECD group experienced negative growth rates, with declines in output in the European Union and Japan, but economic expansion in the United States, Canada, Australia and New Zealand. Economic growth in the OECD countries is forecast to remain moderate and uneven both this year and in 1995. Recessionary tendencies are likely to persist through the forecast period leading to a prolonged sluggish recovery in Europe, a slowing of growth in North America and Australia, and a marked deterioration in Japan.

Our central forecast for the OECD countries, and consequently for the world economy, reflects an increasing divergence of inflationary expectations between the major industrial countries. Furthermore, an escalation of tensions over international trade and political instability have contributed to increased uncertainty that weakens the prospects for economic growth in the global economy.

Inflation is expected to rise in the English-speaking countries, the United States, Canada, United Kingdom and Australia, which were the first among the major countries to move in 1992 into a moderate recovery phase of the recent global cycle. Consumption taxes, energy and other cost related taxes, increased business contributions to labor, stable or slightly improving labor markets, and rising raw material prices have generated this upward trend in inflationary expectations in the English-speaking countries.

In Europe, however, output continued to fall in 1993 and the recovery is projected to start in the summer of this year. …

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