The World Economy in 2006

I. The Long-Term Global Outlook The baseline long-term forecast for the world economy through 2006 points to continuation of growth with a risk of a global recession at the close of the century. The world's output is expected to grow at an average annual rate of 3.9% during the forecast period, 19982006, which is slightly above 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 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 2006 are presented in Tables 4 and 5. Beginning with this fall's long-term forecast, we have reclassified the countries according to the new guidelines introduced by the International Monetary Fund. 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 .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. Consolidation of fiscal policy in the United States and in Europe is expected to lead to significant reduction in budget deficits over the long term. Political pressures in the United States for a balanced budget, combined with the requirement of convergence to low debt-income and deficitincome ratios for monetary unification in Europe, are assessed to result in growth rates of government expenditures below those of potential output, while taxes are expected to rise in line with incomes growth. 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 6.8% in 1996 and is estimated to be around 5.6% this year. It is expected that the progress of the Japanese recovery will result in a fiscal restraint over the long-term. Fiscal restraint has also contributed significantly to the decelerating-inflation economic growth of the developing countries in the nineties. The deficit-income ratio for the group of the developing countries declined from 5.5% in 1989 to 2.9% in 1996 and is estimated to be around 2% during 1997-98. In our forecast, we expect the overall deficit-income ratio for the developing countries to continue its decline and stabilize around 1% by the year 2006. 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 socalled group of seven (G-7), the medium-term goal of price stability has been achieved. In 1996, inflation registered 2.2% in the G-7 countries, compared with 4.3% in 1989 and an average rate of 6% during 1979-88. 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 economic growth for the creation of new employment opportunities. It is, therefore, expected that monetary policy will be slightly expansionary in the major industrial countries, which will result in a moderate acceleration of inflation and a rate of economic growth above the 1.8% average annual rate during 1991-96. …