[Index]
2002 – Global economy needs a growth
locomotive
UNECE releases its Economic Survey of Europe, 2001 No. 2
Geneva, 15 November
2001
"The short-term economic outlook for the ECE region,
and indeed for the world economy as a whole, has become exceptionally
uncertain since the terrorist attacks in New York and Washington on 11
September. The current trends are pointing to a worst-case scenario in which
the simultaneous weakening of economic activity in the major economies, if
allowed to continue, could push the global economy into deep recession"
says Paolo Garonna, Acting Executive Secretary of the United Nations
Economic Commission for Europe (UNECE) commenting on the new issue of the Economic
Survey of Europe, 2001 No. 2.
"One likely consequence of the attacks in the United
States and in the world economy at large is an increase in transaction costs
due to stricter security measures and higher insurance premiums on
cross-border trade and transport services. These could affect business
productivity and the volume of international trade although orders of
magnitude are difficult to gauge. Also government spending on public security
and military defence can be expected to increase. In a context of tight budget
deficit targets this would have to be offset by cutbacks of other, mainly
discretionary expenditure items, such as public investment, or entail the need
to raise taxes," says Paolo Garonna.
Significant downside risks
Predictions of a quick recovery from the cyclical downturn
in the United States have so far proved to be wrong. Although many forecasts
now assume that a recovery will start in the second half of 2002, there are no
definite signs that this will indeed be the case. The main reasons for
scepticism about this are the sizeable internal and external imbalances that
have accumulated in the United States economy in the period 1995-2000. The
orderly unwinding of these imbalances will take time and their presence will
tend to reduce the effectiveness of the considerable stimulus from monetary
and fiscal policy.
The corporate sector needs to eliminate a large amount of
spare capacity before business investment can be expected to respond to the
lower interest rates and assume its traditional role of supporting economic
recovery. In a similar vein, private households need to restructure their
balance sheets and to reduce high debt levels in view of deteriorating
prospects in labour markets and significant stock market losses. As a result,
the outlook for fixed investment and private consumption is not clear and this
leaves the prospects for a recovery in 2002 in doubt.
Global repercussions of the US cyclical downturn
As the United States was the main engine of global economic
growth in 1995-2000, it is clear that a prolonged weakness of the United
States economy will have serious consequences for other regions, notably the
developing countries. This is particularly so for its major trading partners
in Asia and Latin America and also Canada. In Japan, real GDP is expected to
decline not only in 2001 but also next year as well. These developments will,
in turn, further weaken growth prospects for the European economies.
Against this background, there has been a marked lowering
of growth forecasts for the United States, Japan and the euro area for both
this year and next compared with those made before the attacks in early
September (table 1.3.1). The figures for 2002 should, of course, be regarded
with caution – they reflect inevitably rough estimates of the impact that
the attacks and the steeper downturn in the global economy might have on
expectations and confidence, and hence on the spending behaviour of households
and enterprises. At the same time, however, they illustrate the considerable
downside risks facing the global economy given the possibility of a
simultaneous contraction of output in the euro area, Japan and the United
States and the ensuing negative multiplier effects.
By far the largest reductions in the forecasts of economic
growth are those for the United States, especially for 2002, but
expectations have also been reduced substantially for other countries and the
euro area as a whole. Although many forecasts now assume that a recovery will
start in the second half of 2002, the overall strength of economic activity is
seen to remain rather weak for the year as a whole. In the United States, the
consensus view predicts a continued decline of business investment and a
marked slowdown of consumer spending, which had been the main source of growth
until the second quarter of 2001. Business investment has collapsed against a
background of deteriorating prospects for sales and profits. Private
consumption expenditures can be expected to weaken under the impact of a
deteriorating labour market and increasing strains in households’ balance
sheets. Both business and consumer confidence will be depressed by the
heightened uncertainty and this may lead to a postponement of spending plans.
Real GDP in the United States is now expected to increase by only 1 per cent
in 2001 followed by only 1¼ per cent in 2002.
Euro area needs a more courageous policy response
In the euro area, the rate of economic growth is likely to
be only some 1¾ per cent this year, down from 3.4 per cent in 2000 and a full
percentage point less than the European Commission’s forecasts in the spring
2001. On current forecasts, the average growth rate of the euro area in 2002
is unlikely to be much better than this year. The same holds for the aggregate
of the 15 European Union countries (table 1.3.2). The average outcome is
strongly influenced by the pronounced cyclical weakness in Germany, the
largest western European economy. The German government now expects an annual
rate of economic growth of only ¾ of a percentage point in 2001, down from 3
per cent in 2000. Growth is expected to strengthen only slightly in 2002,
largely a reflection of the continued modest growth of the global economy.
In the euro area the virtual stagnation of economic
activity in the second quarter of 2001 increases the probability of a
contraction in the third quarter. The sharp fall of the ifo business
climate index, a key cyclical indicator, in September 2001 signalled a rapid
deterioration of business prospects in Germany. This is likely to be the case
in other member countries as well. Given the weak economic conditions in the
euro area and the global economy at large and forecasts of rapidly declining
rates of inflation, the ECB has room for a further loosening of monetary
policy. As regards fiscal policy, at minimum the automatic stabilizers should
be allowed to operate fully in order to avoid procyclical effects. The ECB has
argued in favour of continued fiscal discipline in the three larger economies
of the euro area in line with the letter of the Stability and Growth Pact. But
it is difficult to reconcile the two policies – demanding fiscal discipline
in a cyclical downturn and at the same time pursuing an overly cautious
monetary policy – either with each other or with the current needs of the
European economy.
It was accepted in the early years of EMU, that countries
with large budget deficits – i.e. close to 3 per cent or above – would
need time to achieve the desired medium-term fiscal position of
"close-to-balance or in surplus" and that in the event of a severe
cyclical downturn in the early years of EMU they could therefore be forced
into a procyclical fiscal stance by the rules of the Stability and Growth
Pact. The probability of such a risk was, of course, unknown but it was
assumed that a sustained cyclical upturn would enable the medium-term fiscal
targets to be reached. But actual developments have not turned out that way.
The euro area is now on the edge of recession in a very worrisome global
context. One of the major principles of the Pact, namely that fiscal
discipline is a precondition for eventual fiscal flexibility, is therefore
hardly adequate for the current economic situation, which was not envisaged
when the Pact was designed. It can, of course, be argued that countries have
not done enough to consolidate their fiscal positions, although this is not
only a matter of choice but also of economic circumstance. But there is no
point in crying over spilt milk. "What is required now in view of
European and global economic conditions is a more flexible interpretation of
the Pact and the national stability programmers to allow fiscal policy to
offset the weakening of private sector demand" stresses Paolo Garonna.
The costs of a further weakening of global growth and a
failed recovery in the United States are potentially so high that
governments should take measures to avoid such an outcome. In view of the
increasingly large downside risks to the global economic outlook, there is now
an urgent need for a coordinated policy response, including multilateral
measures, to ensure a sustainable recovery, avoid disruption to the liquidity
needs of developing countries and guarantee the inflow of other funds to
support their economies as advocated by UNCTAD and the IMF.
Europe leading global growth?
The current situation is especially worrisome because of
the presence of factors that have been posing serious risks for the world
economy for quite some time but which have become more acute in a context of
sharply diminished growth expectations. Apart from the fragility of the
financial sector in Japan and the risk of emerging market crises, this refers
especially to the considerable domestic and external imbalances in the United
States economy. The reduction of these imbalances is a necessary condition for
a new sustainable upswing. There is now a much greater risk that the
inevitable adjustment costs to be borne by the rest of the world (mirrored in
the reduction of its current account surplus) will be abrupt rather than
gradual: sudden and large changes in exchange rates and in the direction of
international capital flows would greatly increase the risk of international
financial turmoil and of even larger disruptions to global economic activity.
In the United States, both monetary and fiscal policy has
shifted to a significantly more expansionary stance. It can be expected that
the Federal Reserve will lower interest rates further if there are no definite
signs of a recovery emerging in the near future. Hopes for a rapid and strong
rebound of economic activity in the United States in the course of next year
(the so-called V-shaped recovery) – with concomitant benefits for the rest
of the world – are pinned on the potential stimulus to domestic demand
associated with the expansionary stance of fiscal and monetary policies. But
such a domestic demand-led recovery in the United States economy could turn
out to be a mixed blessing for the world economy because it would only
postpone the inevitable reduction of the large domestic and external
imbalances and actually increase the risk of abrupt and disruptive adjustment
referred to above.
Sustained growth in the rest of the world, especially in
western Europe, would create the best environment for a smoother adjustment in
the United States. The orderly reduction of economic imbalances in the United
States requires sustained growth in the rest of the world, especially in
western Europe and Japan. In Japan, huge fiscal imbalances and official
interest rates close to zero have left economic policy with little room for
manoeuvre, although there is still some scope for further monetary easing to
reverse deflationary pressures and stimulate domestic demand. "More
generally, western Europe needs to face the fact that the strengthening of
global economic growth forces cannot be left to the United States alone. In
western Europe, the need for greater reliance on domestically generated growth
now requires the maintenance of an expansionary stance of economic policy.
Such a stance, which would support the United States economic policy, has now
become crucial to sustain the global economy" concludes Paolo Garonna.
TABLE 1.3.1
Changes in the consensus forecasts of economic growth in
2001 and 2002
(Percentage change over previous year)
|
|
Survey data |
Change a |
|
|
|
10 Sept. 2001 |
8 Oct. 2001 |
|
|
|
|
|
2001 |
2002 |
2001 |
2002 |
2001 |
2002 |
United States |
1.6 |
2.7 |
1.0 |
1.2 |
-0.6 |
-1.5 |
Canada |
1.8 |
2.7 |
1.4 |
1.7 |
-0.4 |
-1.0 |
Euro area |
1.9 |
2.4 |
1.7 |
1.8 |
-0.2 |
-0.6 |
France |
2.4 |
2.5 |
2.0 |
1.8 |
-0.4 |
-0.7 |
Germany |
1.1 |
2.1 |
0.9 |
1.5 |
-0.2 |
-0.6 |
Italy |
2.1 |
2.4 |
1.9 |
1.5 |
-0.2 |
-0.9 |
United Kingdom |
2.1 |
2.6 |
2.1 |
2.1 |
– |
-0.5 |
Japan |
0.1 |
0.5 |
-0.5 |
-0.4 |
-0.4 |
-0.9 |
Source: Consensus
Economics Inc., Consensus Forecasts (London), various issues.
a Percentage points.
TABLE 1.3.2
Real GDP in the ECE market economies, 1999-2002
(Percentage change over previous year)
|
|
1999 |
2000 |
2001 a |
2002 a |
France
|
2.9 |
3.1 |
2.0 |
1.8 |
Germany
|
1.8 |
3.0 |
0.8 |
1.5 |
Italy
|
1.6 |
2.9 |
1.9 |
1.5 |
Austria
|
2.8 |
3.3 |
1.8 |
2.3 |
Belgium
|
2.7 |
4.0 |
1.8 |
2.2 |
Finland
|
4.0 |
5.7 |
2.1 |
2.7 |
Greece
|
3.4 |
4.1 |
3.7 |
3.7 |
Ireland
|
10.8 |
11.5 |
5.5 |
4.8 |
Luxembourg
|
7.5 |
8.5 |
5.6 |
4.2 |
Netherlands
|
3.7 |
3.5 |
1.3 |
1.6 |
Portugal
|
3.3 |
3.2 |
1.9 |
2.1 |
Spain
|
4.0 |
4.1 |
2.7 |
2.3 |
Euro area
|
2.6 |
3.4 |
1.7 |
1.8 |
United Kingdom
|
2.3 |
3.0 |
2.1 |
2.1 |
Denmark
|
2.1 |
3.2 |
1.1 |
2.1 |
Sweden
|
4.1 |
3.6 |
1.6 |
2.0 |
European Union |
2.6 |
3.3 |
1.8 |
1.9 |
Cyprus
|
4.5 |
4.9 |
4.5 |
4.6 |
Iceland
|
4.3 |
3.6 |
1.5 |
1.7 |
Israel
|
2.6 |
6.2 |
1.0 |
3.0 |
Malta
|
4.0 |
4.3 |
4.3 |
4.3 |
Norway
|
1.1 |
2.3 |
1.2 |
1.9 |
Switzerland
|
1.5 |
3.4 |
1.6 |
1.5 |
Turkey
|
-5.0 |
7.2 |
-6.0 |
3.0 |
Western Europe |
2.2 |
3.5 |
1.4 |
1.9 |
Canada
|
5.1 |
4.4 |
1.4 |
1.7 |
United States
|
4.1 |
4.1 |
1.0 |
1.2 |
North America |
4.2 |
4.2 |
1.0 |
1.2 |
Japan
|
0.8 |
1.5 |
-0.5 |
-0.5 |
Total above |
2.8 |
3.5 |
0.9 |
1.3 |
Memorandum items: |
|
|
|
|
|
|
4 major west
European economies |
2.1 |
3.0 |
1.6 |
1.7 |
Western Europe and
North America |
3.2 |
3.8 |
1.2 |
1.6 |
Source: OECD, National Accounts of OECD Countries (Paris) various issues; Eurostat,
New Cronos Database; national statistics; Consensus Economics Inc., Consensus
Forecasts (London), various issues.
a Forecasts.
For further information please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UNECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Phone: (+41 22) 917 27 78
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Web site: http://www.unece.org/ead/ead_h.htm
Ref: ECE/GEN/01/25