Yearender: World economy heading for strong recovery

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Last updated at: (Beijing Time) Thursday, December 18, 2003

Yearender: World economy heading for strong recovery

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The global economy is showing a rosy picture of palpable recovery, with the International Monetary Fund (IMF) predicting the world gross domestic product (GDP) will grow at an annual 3.2 percent rate in 2003 and a 4.1 percent rate in 2004. But the nascent global recovery is not without risks, economists warn.

A US-LED REBOUND

During the early months of 2003, the world economy remained in stagnation. This was primarily due to fears about the coming war in Iraq, which triggered weakening investor and consumer confidence, and high oil prices. However, with the end of major war in Iraq, the world economy is showing signs of improvement.

Economists say a pickup in the stock market, a drop in oil price, rising confidence among investors and consumers, and economic stimulus in the United States and other top economies arelikely to underpin the economic expansion.

Since the second half of this year, leading economies around the world have seen a good momentum of recovery.

The United States, which accounts for 20 percent of the world economy, is leading the improvement, with its GDP increasing at anannual rate of 8.2 percent in the third quarter, the quickest pacein almost 20 years.

Japan's economy, the world's second largest, had a better performance with an annualized growth rate of 1.4 percent in the third quarter.

In the 12-nation eurozone, the growth was not particularly strong, but it was growth nonetheless. The eurozone economy edged up 0.3 percent in the third quarter after a prolonged slump, up from a minus 0.1 percent in the second quarter.

The Asian economy escaped the short-term slowdown resulting from the impact of Severe Acute Respiratory Syndrome (SARS), moving toward with a much stronger growth.

J. P. Morgan Chase, the leading US investment bank, estimates emerging economies grew at an average rate of 8.7 percent in the third quarter, more than twice as fast as the developed world, andtheir quickest pace since 1994.

BULLISH 2004

Looking ahead to the coming year, it is becoming increasingly evident that the global economic growth will accelerate at a higher rate than this year.

The Economist magazine said in a recent story that global growth in 2004 is widely forecast to be above its long-term potential rate for the first full year since 2000.

In its biannual Economic Outlook report released in November, the Organization for Economic Cooperation and Development (OECD) said its 30 member economies should enjoy growth of three percent in 2004, up from an expected two percent in 2003, with the United States expected to expand at 4.2 percent next year, up from a forecast of 2.9 percent this year.

In Japan, the growth next year is not so big as the 2.7 percentthis year, but the Japanese economy will probably grow by 1.8 percent.

But the eurozone economy will rise from 0.5 percent in 2003 to 1.8 percent in 2004, according to the Paris-based organization's forecasts.

In a report released in September, the IMF projected the economy in developing countries would jump five percent in 2003 and 5.6 percent in 2004, with developing Asia set to expand at 6.5percent next year, up from a forecast 6.4 percent this year.

In Latin America, the growth will be 1.1 percent in 2003 and 3.6 percent in 2004.

Even in Africa, the growth should rise from a robust 3.7 percent this year to 4.8 percent in 2004.

BEHIND THE RECOVERY

What is the basis for the prediction of a stronger recovery in 2004? Economists suggest that four elements are particularly important:

In the first place, given the fact that inflationary pressures in the United States and the eurozone have been easing, and deflationary pressures, the root cause of the many serious economic problems in Japan over recent years, still persist in theworld's second largest economy, the central banks of the United States, Japan and Europe are expected to adhere to their expansionary monetary policy, in a bid to stimulate economic recovery in the developed world.

Secondly, backed by a pickup since March in Western stock markets and a surge in corporate earnings, corporate investment inthe United States and other developed countries have grown sharply,giving fresh impetus to the economic rejuvenation.

U.S. corporate investment in equipment and software surged 18.4percent year-on-year in the third quarter, up from a 8.3 percent rate in the second quarter, while capital investment by Japanese firms went up 0.5 percent over the previous quarter.

Thirdly, with Iraq's oil exports resuming and oil production among non-OPEC countries soaring, as many economists suggest, global oil prices will drop from 30 US dollars per barrel this year to 25 dollars per barrel next year.

Fourthly, the major developing countries like China and India have achieved a sustained rapid growth, becoming a second powerfulengine of global growth alongside the United States.

RISKS REMAIN

However, there are still some risks on the road to world economic recovery in the coming year, economists say.

They say the outlook for the world economic recovery may experience some volatility due to a still fragile economy in developed countries, a growing trend of trade protectionism and the threat of terror attacks against the United States and its allies.

Meanwhile, the rising US federal budget and current account deficits will probably result in sharp exchange rate fluctuations,casting a cloud over the global financial market and the recovery of the world economy.

"The persistence of very large current account imbalances at this early stage of the recovery may also complicate the outlook,"said OECD Chief Economist Jean-Philippe Cotis.

"The combination of large public and external deficits in the United States could be a source of exchange rate instability, given the potentially short-run nature of much of the international capital currently flowing in," he said.

And there are concerns about the high levels of household debtsin some countries, notably the United States and Britain. There are also worries that housing prices are too high in some countries -- Britain and the United States again -- and that the bursting of the asset price bubble could cause consumers to trim their spending.

The eurozone is still facing structural problems in its rigid products and labor markets while Japan has not got rid of deflationary pressures and cumulative non-performing loans.

Given the risks facing the world economy, economists recommend that governments in leading economies need to push ahead with structural reforms to ensure a healthy, sound and rapid recovery.

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