Issue No. 595
Economy
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18 - 24 July 2002 Issue No. 595 Economy |
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IMF optimistic on global economy
The world economy may be on the road to recovery, a recent International Monetary Fund (IMF) report concludes
The World Economic Outlook, April 2002 provides a broad review of these developments. Focusing on growth and economic recession, this IMF (International Monetary Fund) report provides forecasts, highlights risks and offers policy recommendations, Niveen Wahish writes. It also attempts to put the current global slowdown into context.
Click to view captionAlthough the underlying conclusion of the report is that the global slowdown has "bottomed out", it also isolates regions that are an exception to this trend and stresses that economic recovery varies across the globe. Thus, recovery is governed by "the openness of the economy, policy stimuli and country-specific factors and constraints". It predicted that the global economy will grow by some 2.8 per cent in 2002.
However, the report also highlights a key risk: volatility in oil prices, especially if the situation in the Middle East deteriorates. Rising oil prices would favour exporting countries, but would harm most industrial and emerging market economies.
Contrary to expectations, the events of 11 September have not prevented an economic recovery in the first half of 2002. According to the report, the pace of recovery in the US and countries with which it has close economic links, has exceeded expectations.
The report stressed that domestic demand in the US has been enhanced by a substantial macroeconomics stimulus package. For "Euroland", the pattern has been similar to the US, but slower. This has been attributed to a more "moderate" slowdown and a more cautious macroeconomics policy than in the US. However, unlike the US, there is less risk from domestic imbalances and corporate profitability remains strong. Nonetheless, the report said that weaker than expected external demand or rigidities in labour markets could dampen the pace of the rebound in the short to medium term.
The outlook for Japan remains very weak. While GDP growth, compared with the previous year, is expected to return to positive levels by the fourth quarter of 2002, this will depend, primarily, on an improvement in the external economic environment.
In Latin America, recovery is likely to be strongest in Mexico and other parts of Central America, which are closely linked to the US. In Argentina, the situation remains extremely difficult. However, the crisis has not spread, largely because it was anticipated.
Growth in China and to a lesser extent India is expected to remain buoyant. The other economies of the Asia-Pacific region will benefit from a pick-up in external demand, although much will depend on the pace of recovery in the IT sector, which accounts for a substantial share of production and exports.
The outlook for the Middle East was not too optimistic. The report forecast growth to slow significantly in 2002, continuing the pattern of 2001. This has been attributed to regional security issues as well as low oil prices at the time of the report's publication.
Egypt has been adversely affected by the events of 11 September, in particular, through lower tourism earnings. The report also forecast a "sizable overall deficit" for the 2002 balance of payments. Growth is expected to slow to less than two per cent this year, down from 3.3 per cent in 2001. However, it did foresee a recovery in 2003.
The report added that a depreciation of the Egyptian pound will help strengthen Egypt's balance of payments performance, but also pointed out that flexibility will be important in the future. Furthermore, structural reforms will be required to achieve the growth needed to absorb the ever-increasing labour force and reduce unemployment.
The effect of turmoil in the Middle East was most apparent on Israel. According to the report, a growth rate of 1.3 per cent may be possible for the Israeli economy in 2002, provided substantial improvement in the "extremely difficult" regional security situation takes place.
In the West Bank and Gaza, the report estimated that economic activity dropped by 30 per cent last year. This was due to a tense security situation, border closures with Israel and internal blockades. Additionally, the report highlighted damage to the area's infrastructure.
For oil exporting countries growth is expected to slow from 5.0 per cent in 2001 to 3.4 per cent in 2002. However, the slowdown has been minimised by the application of more prudent macroeconomics policies. The report stressed that these countries need to diversify production into sectors other than energy, leading to a lower dependency on their oil revenues. It also said that if these economies are to remain attractive to both foreign and domestic investors, structural reforms need to be deepened, with more reforms in the areas of trade, the exchange rate, price liberalisation, financial sector deregulation, public enterprise restructuring, privatisation, labour markets and social security.
Iran was commended by the report for making good progress in these areas. Its growth is projected at 5.3 per cent.
In summation, the report is cautiously optimistic: Assuming that these trends continue, this global slowdown could be considered moderate compared with previous recessions. "It may not even qualify as a full-fledged global recession," the report added. However, it was, as the report put it, "a close call".
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