Global Monetary Easing Brings a Rebound in Growth

I. Global Assessment and Outlook After a remarkable performance during the expansionary phase of the global business cycle, the major industrial countries led by the United States appear to experienced uneven declines from their cyclical peaks that reached in the first half of 2000. The disparities in the current economic weakening among industrial countries have increased uncertainty and, consequently, instability in the financial markets. In the United States, the business and policy environment supporting investments in information technology at a rapid pace reached its cyclical high in 2000. With a year lag, the rest of the world, in particular the industrial countries, underwent the US-led technology transformation with restructuring and adjustments at a slower than the United States pace resulting in divergent productivity gains and economic growth developments. The extent and the timing of the current global slowdown have not yet been well identified because of the lag in the availability of overall economic data such as GDP. The current assessment of the situation by businesses and policy makers relies on monthly data. In the United States, several indicators such as the National Association of Purchasing Managers (NAPM) index, the Conference Board's leading indicator and consumer confidence are falling to cyclical lows and point to a substantial economic slowdown or even a recession. It is widely accepted that the manufacturing sector of the United States economy has been already in a recessionary phase of the cycle. Similarly, in the Euro Area overall economic growth weakened in the second half of 2000. Monthly industrial production indicators declined and leading confidence indicators for consumers and businesses have been falling pointing to a deterioration of the European economic conditions. The current slowdown has its roots in structural, cyclical and policy elements of the business cycle. The uneven and desynchronized technology stimulus has generated the structural forces that partially have shaped the current path of the global economic slowdown. The cyclical factors of the lead/lag relationship of investment, profits, consumer expenditures and inventories have substantially contributed to the recent phase of the cycle. An investment-led growth has been the characteristic of the last United States economic boom. Another important factor that identifies each country's strength and position in the global cycle is economic policy, particularly monetary policy, and its relation to domestic and external imbalances. There were two important factors under consideration in building the baseline forecast for the global economy: Will investment growth stagnate? The recent economic boom has been driven by a remarkable growth in investment, especially in the technology area. Declines in investment, caused by a profits slowdown and/or unrealistic and unsustainable high investment levels in the recent past, will have serious consequences on the overall economic activity and may lead to recessions in several countries. What will be the monetary policy? Central banks have the ability to quickly react to economic conditions. The effects of monetary policy appear on the economy with a lag of about one-year. It is, therefore, apparent that an assessment of current economic conditions and an evaluation of the anticipated design of monetary policy will be of enormous importance for the short-term forecast of the global economy. About 700 business executives from around the world have provided an input to answer these two questions. Looking at Table 4, the business experts from all geographic areas except in the United States and Canada have evaluated investment capital expenditures - to have increased in the first quarter of 2001 compared to the same quarter in 2000. When the business executives were asked to anticipate capital expenditures in the next two quarters, they projected declines from current levels, with the exception of the developing countries in Africa and the countries-in-transition Eastern Europe and the former states of the Soviet Union, the Confederation of Independent States (CIS). …