Rising Inflation and Widening of the Global Slowdown

ECONOMIC OUTLOOK The world economy continues its gradual economic weakening as total output growth slowed to 2.5% in 1998, compared with 4.2% in 1997 and 4.3% in 1996. The current slowdown in the global business cycle began with the crisis in the Asian economies - Thailand, Indonesia, Korea, and Malaysia - in 1997, followed last year by Japan's deepening recession, Russian's default, and the Brazilian crisis. An important characteristic of the current global slowdown is the resilience of most of the industrial countries to the crises in the emerging markets. In particular, the United States economy advanced in 1998 at a growth rate of 3.9%, which is the same as in 1997. In the European Union, output in 1998 expanded by 2.8%, after a growth rate of 2.7% in 1997. During the same period, in the developing countries, as a group, output growth in 1998 slowed to a rate of 3.3%, compared with 5.7% in 1997, and an average growth rate of 6.5% during 1992-1996. Another important characteristic of economic developments in the current phase of the global business cycle has been the growth and directions of international trade. The growth in world trade volume slowed sharply to 3.3% in 1998 from 9.9% in 1997, and is forecast to average an annual rate of about 4.3% during 19992000. Last year, growth in developing countries' imports declined by -3% after a strong 7.5% growth in 1997. Last year, however, in the advanced economies imports increased by 4.7 % led by the United States and the European Union, where imports advanced by 10.6% and 7.8% respectively. These global economic and trade trends strongly demonstrate that the economic performance of developing countries is no longer so dependent on the industrial countries' economic growth. Consequently, in this new global interdependence environment, the economic weakness in the developing world would result to an export-led slowdown in the growth in the industrial countries as well as would influence international prices and financial markets. Given these new dynamic economic developments of interdependence in the world economy during 1997-98, our global forecast projects gradually accelerating inflation rates in the advanced economies for the following reasons: First, the projected recovery in the developing countries and the expected slowdown in the industrial countries would result in stabilization of world output growth to a rate of 2.5% over the forecast horizon. Last year, growth in the developing world was 3.3% against 2.2% in the advanced economies. In 1999-2000, the developing countries are projected to register about 3% output growth, while the growth rates in the advanced countries are expected to decline and is forecast their economies to grow as a group by only 1.6%. Second, an increase in global inflation is bound to accompany the stabilization of global demand and the expected synchronization of economic growth patterns, reflecting a reversal of the inflation=s downward trend seen in recent years. In the developing countries, inflation has been declining in the last five years from 51.8% in 1994 to 22.2% in 1995, 14.3% in 1996, and 9.4% in 1997. During this period, 1994-1997, the developing economies were expanding at an annual rate of 6.3%. Last year, however, there was a reversal in the developing countries= inflation rate, which registered 10.4%, one percent higher than in 1997. Also, last year, economic growth in the developing countries substantially slowed and averaging 3.3%, about one half the growth rate achieved during 1994-97. In the advanced economies, increased labor market flexibility and productivity improvements in the last three years reduced the inflation rate from 2.4% in 1996 to 2.1% in 1997 and 1.6% in 1998. Recently released statistics point out to an end of declining inflation rates in the advanced economies. Therefore, the recovery in economic growth in the developing high-inflation countries coupled with unsustained inflation declines in the advanced low-inflation countries is expected to result in an overall acceleration in the global inflation rates in 1999-2000. …