International Economic Outlook

Article excerpt

ASYMMETRIC GLOBAL INVESTMENT CYCLES TO DESTABILIZE FINANCIAL MARKETS I. INTERNATIONAL INVESTMENT CYCLES

Business investment cycles historically have contributed to fluctuations in output and employment through a variety of demand and supply channels, including the effects of profitability on balance sheets, as well as the impact of the associated technological changes on labor productivity, wage growth, and consumer demand. The synchronized nature that used to exist in the investment cycles in industrial countries appears to have broken down in the late 1980s. In preparation for the "Europe 1992" stage of economic integration, an investment boom took place in Western Europe. In the member countries of the European Union, private domestic investment in real terms increased by an average rate of 6.3% during 1987-1990. During the same period, investment advanced by an average rate of 9.9% in Japan, and went up by a modest 0.5% annual rate in the United States.

Following an investment growth reversal, the regional disparities in the investment cycles have continued to persist in the 1990s. During 1991-95, private investment growth in the United States exceeded substantially both European and Japanese growth. Following a sharp decline of 7.6% in 1991, investment ended up to advance by an annual average rate of 5.6% during 1991-95 in the United States. At the same time, investment declined by 0.4% per year in the European Union and registered a zero average growth rate in Japan.

Investment cycles and economic cycles are closely related and, typically, investment cycles are leading economic cycles. As an important component of demand, the contribution of investment to the overall economic growth has been substantial. According to the evidence presented in Table 4, the growth of investment accounted for 35% of the growth of output in the United States during 1990-94, and for a full 52% in 1995. Investment growth in Japan, and, more importantly, in the European Union, has detracted from economic activity, providing essentially no contribution to the overall modest economic activity. Furthermore, looking at the forecasts on investment developments during 1996-97 in the three major industrial countries/areas, it becomes apparent that in the United States the investment boom of the 1990s has ended and that both Japan and the European Union are in the upswing of their investment cycle. Specifically, the European Union is now leading the new growth phase ofthe global investment cycle, followed by Japan and predictably by the United States. The slowdown of economic activity in the industrial countries at the end of 1995 and the expected moderate growth in 1996 can, therefore, be explained by the desynchronization of the investment cycles. The United States is approaching the global cycle's trough and the European Union, followed by Japan, have entered the recovery phase. The current reversal of the investment growth patterns in the industrial countries contributes to financial markets volatility leading to internal and external imbalances. The resulting erratic fluctuations in market interest rates, misalignment of currencies and swings in international capital flows may aggravate the risk for serious economic crises, which could lead to significant shifts in consumer confidence and business sentiment.

The recent Economic Survey International (ESI) conducted by the German Ifo Institute for economic research has arrived at a similar assessment of current worldwide economic trends. About 430 business leaders from 62 countries have indicated that the slowdown of global economic growth continued in the last quarter of 1995. The experts polled by the ESI have remain cautiously optimistic about the developments of the world economy in the next six months. The regional expectations of the business executives are as follows:

Optimism is growing in countries that now are facing unsatisfactory economic conditions such as Japan and Mexico. …