Regions and Countries

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The global economy⁶

Intraregional trade accounts for the largest external dependency in most countries in developing Asia. There is In 2000, the global economy continued to recover from the 1997–1998 slowdown caused by the Asian financial crisis, growing by 4.8 percent, which is the best growth performance in 13 years. The biggest boost to global growth from 1998 to 2000 came from the US, where GDP growth in 2000 was 5.0 percent. Economic growth was also vigorous in developing Asia, the Euroarea,⁷ Latin America, and the transitional economies of Russia and Central and Eastern Europe. Growth in Russia accelerated in 2000 because of increases in the international prices of oil and gas.

However, the sustainability of global economic growth became uncertain in the second half of 2000. Prospects of further interest rate hikes and a slower pace of economic growth in the US, then in its ninth year of expansion, dominated concerns in global financial markets and among policymakers. The technology-heavy Nasdaq index in the US fell by roughly 33 percent on expectations that a slowdown in the US economy would be led by a softening of growth in the technology sector. Given the high correlation of Asian equity markets with the Nasdaq index and the high degree of dependence of most major economies in developing Asia on electronic exports to the US, domestic currency and stock markets plunged across the region. The euro fell to a record low, causing the Group of 7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and US) and the European Central Bank to intervene in currency and money markets to arrest a further decline in its value. Inflationary expectations for 2001 and euro-related concerns led to a tightening of monetary policy by major industrial economies in 2000.

Amid improving domestic demand in Asia, Europe, and Latin America and dwindling winter oil inventories in the US, oil prices increased, reaching $36 per barrel by November 2000, compared with $25 per barrel in December 1999, and leading to further concerns about a global economic downturn.

Consumer price inflation remained generally low in both developed and developing economies as a result of stronger fiscal discipline and monetary restraint in many countries. While oil prices rose by over 70 percent, nonfuel prices remained at levels similar to those in 1999, which helped keep inflation subdued in product markets. However, asset prices displayed considerable volatility in most industrial economies.

World trade volume rose by over 12 percent in 2000, more than double the growth rate recorded in 1999, with the developing countries affected by the 1997 global financial crisis (Latin America and developing Asia) remaining at the forefront in world trade volume growth.

The majority of global capital flows in 2000 were characterized by a net inflow to the US, which attracted significant direct and portfolio investment. These inflows-- net of outflows--financed a US current account deficit of 4.4 percent of GDP in 2000. Much of the net capital outflow from the European Union⁸ was used to finance foreign mergers and acquisitions and issuance of liabilities internationally by regional banks.

The overall growth in the industrial countries notwithstanding, there was considerable variation in economic performance among individual countries in this grouping.

GDP growth in Japan in 2000 was 1.7 percent, largely led by exports and information technology-related consumption and investment.

The US GDP growth rate rose to 5.0 percent in 2000 from 4.2 percent in 1999, although consumer price inflation remained at a moderate rate of 3.4 percent in 2000. Owing to the downward adjustment in the price of technology stocks, the strong wealth effect in the US during the past few years began to moderate in 2000, causing private consumption growth to remain flat at 5.3 percent. As for the external balance, consumption demand has been increasingly met by imports, resulting in an increase in the US current account deficit to 4.4 percent of GDP in 2000 from 3.6 percent of GDP in 1999.

In 2000, the Euroarea gained momentum for the third time in the past decade. GDP growth was 3.4 percent, compared with 2.6 percent in 1999. The Euroarea benefited both from the boost given to exports by the weak euro and increased domestic consumption and investment. Unemployment remained high at 9.0 percent in 2000, but was nevertheless lower than the 9.9 percent recorded in 1999. The European Central Bank (ECB) raised interest rates in August and October, but inflation remained above ECB’s medium-term target of 2 percent. Large differentials in inflation rates remained among the Euroarea member countries.

In sum, the major vulnerabilities of the global economy are a slowdown in the US economy and external imbalances in the industrial countries. As for the US, the concern is on whether the previous strong productivity gains in computer technology and increases in labor productivity across a wide range of sectors that take advantage of computer technology can be sustained. As for the industrial countries as a whole, external imbalances continued to grow—notably the current account deficit in the US. Any correction of significant proportions in the US current account would negatively impact manufactured exports from developing Asia. Further, if the adjustment is large, the US dollar would weaken relative to other currencies, further depressing the US demand for exports from Asia and the Pacific.

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