|
Global economy avoided recession
last year according to IMF
On 18 April, the International Monetary Fund (IMF) presented its bi-annual
publication, the World Economic Outlook. According to the IMF, the global
economy averted a recession last year by a narrow margin. If applying the
most commonly used rule for defining a national recession as two straight
quarters of negative Gross Domestic Product (GDP) growth, the global
economy has clearly avoided recession, since world aggregate GDP growth
last year was positive. However, global economic activity rarely declines
since world production is more diversified than national output. Therefore,
it is useful to have another benchmark for identifying slowdowns that
could be labeled as global recessions. In fact, instead of relying on a
mechanical rule only, such as negative per capita GDP growth, the IMF also
relies on some degree of judgment as is the case with the National Bureau
of Economic Research (NBER) in the identification of recessions in the
United States.
The NBER defines a recession as a “significant decline in activity spread
across the economy, lasting more than a few months, visible in industrial
production, employment, real income, and wholesale-retail sales”. The NBER
claims that the United States entered into recession in March 2001 and as
of yet has not announced and end to recession (Note that the recession
call occurred in November last year well after the beginning of the
recession and potentially even after the economy started expanding again).
Since a NBER recession call is generally characterized by a degree of
arbitrariness and not always based on a fixed and easily identifiable rule,
the NBER decisions are not without criticism. The Secretary of Treasury
recently claimed that the US never even entered into recession, since the
GDP only contracted in the third quarter and thus did not meet the rule of
thumb of two consecutive quarters of negative GDP growth.
Similar to the “methodology” used by NBER, the IMF looks at other factors
such as monthly data on global industrial production and merchandise trade
volumes to determine whether an economy has entered into recession. In
addition to the global aggregates, the IMF monitors the geographic
extension and velocity of an economic slump and also draws on quarterly
GDP numbers in its assessment. For the current slowdown, the IMF states
that while the third quarter contraction in the United States was also
observed elsewhere, the US picked up again in the final quarter last year
and some regions skirted negative growth altogether. Therefore the IMF
believes that the recent slowdown fell somewhat short of a global
recession and that 2001 does not line up behind other global recessions in
1975, 1982, and 1991.
China and India act as cushion
against global recession in 2001
One reason why the IMF classifies last year as non-recessionary is due to
the methodology applied when calculating world aggregate growth. The IMF
uses weights based on GDP at purchasing power parity (PPP) exchange rates.
This method seeks to smooth out price differences between countries for
the same goods and services. As a result, ex-Japan Asia gains considerable
weight in the global aggregate, whereas the United States, Japan and the
Euro Area loose importance. The largest difference affects China, which in
2001 at market exchange rates accounted for 3.7% of global output but
“weighed” 12.0% when using the PPP method. India also more than triples in
importance, adding from 1.5% to 4.7%. As a result of the higher weights
for these two economies, which performed above average last year, the IMF
calculates global growth for 2001 at 2.5% compared to 1.4% according to
calculations based on market exchange rates (MER). Note: LatinFocus uses
the latter method to account for obvious shifts in the importance of
economies caused by large exchange rate movements (such as currently in
Argentina) which would otherwise go unnoticed when calculating a regional
aggregate using the PPP weights.
US current account deficit raises
concern
For 2002, the IMF expects a mild global recovery with GDP growth reaching
2.8% according to PPP methodology (1.8% using market exchange rates),
picking up to 4.0% in 2003 (3.2% MER). This is a notch below the Consensus,
which sees the global economy adding 2.0% this year and 3.3% next year.
According to the Fund, the United States will lead the global recovery
with growth reaching 2.3% this year. While this is well below the rate of
expansion currently projected by the LatinFocus panel (+2.7%, up 0.3
percentage points since last month) the Fund’s assessment of the 2003
outlook (+4.3%) is much more optimistic than the private sector analysts
polled in the LatinFocus Consensus Forecast publication (+3.4%). Despite
this optimism about the economic development in the United States, the IMF
does see an area of vulnerability in the world’s largest economy posed by
a persistently high current account deficit. Since the United States is
likely to lead the global upswing, the country’s current account deficit
is unlikely to shrink to sustainable levels automatically. In fact, the
Consensus sees the deficit even adding a notch from the level reached in
2001 to reach 4.2% this year. The persistence of the deficit raises
concerns that the imbalances in the US external accounts may end in sharp
exchange rate realignment.
US first quarter economic growth
surprises on the upside
However this is a medium-term risk and for the time being the resilience
of the US economy once again surprised observers on the upside. On 23
April, the Bureau of Economic Analysis informed that according to its
advance estimates, real GDP increased at an annual rate of 5.8% in the
first quarter of 2002, following on 1.7% growth in the fourth quarter last
year. The reported advance estimate of the first quarter growth rate,
which may still change significantly, surpassed market expectations of
5.0%. The strong reading was mainly driven by an "inventory swing" that
occurred as businesses, who had depleted their stocks last year, relied
much less heavily on existing inventories to meet demand for their
products. As a result, the change in inventories contributed more than
half to the GDP growth (3.1 percentage points) recorded in the first
quarter. Fixed investment remained in negative territory, but the 0.2%
contraction represented a marked improvement when compared to the double
digit declines reported for the final quarter last year. Growth of
personal consumption slowed down from the 6.1% rate registered in the
fourth quarter but still contributed positively to overall growth,
expanding by 3.5% in the first quarter. The positive contributions of
these components were partly offset by a decrease in non-residential
structures and imports. Importantly for the development of the global
economy and Latin America in particular, imports increased at a staggering
15.5% rate, following on five consecutive quarters of declining imports.
Recession in Japan, sluggish growth
in Europe
In contrast to the positive development in the United States, Japan
remains mired in its third recession in a decade. The Fund predicts the
economy to contract a full percent this year. Moreover as the country is
unlikely to successfully tackle its structural imbalances in the near
future, such as problems in the banking sector, which are responsible for
the protracted economic slump, growth is seen to remain below one percent
next year. The IMF commends the Euro Area for having interpreted its
growth and stability pact in a flexible fashion, allowing for more fiscal
leeway to counter the slowdown resulting from the events of 11 September,
but was less enthusiastic about the monetary policy response of the
European Central Bank (ECB), which reacted much more cautiously than the
US Federal Reserve Board in cutting interest rates. Since the European
economies did not contract as sharply as the US, the recovery is expected
to be milder and delayed – partly due to the less aggressive policy
response. For 2002, the IMF expects the Euro Area’s economy to expand by
1.4%, doubling to 2.9% in the coming year.
Oil price could pose a threat to
global economy
Finally, while the Fund sees a very solid global economic recovery, it
also acknowledges some downside risks resulting from the non-economic
sphere as incidents such as a sustained crisis in the Middle East or
terrorist attacks could undermine confidence and stall the recovery. In
particular, a rising oil price could pose a substantial risk to the
rebound. Currently the IMF expects the oil price to average US$ 23 in
2002, and US$ 22 in 2003. A sharp spike in oil prices would have a
significant negative impact on the global economy. According to IMF
estimates, a rise for one year of US$ 5 per barrel would lower global
growth by 0.3 percentage points.
Note: The above text is an abridged version of the LatinFocus
Consensus Forecast briefing for Latin America. For more details
please click
here.
continue |
Economic Forecasts
from Top Financial Institutions. Order
here!