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p. 3 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects Introduction and Overview The World Economy Developing Economies Risks and Uncertainties II. Economic Trends and Prospects in Developing Asia III. Asia's Globalization Challenge

Asian Development Outlook 2001 : I. Developing Asia and the World - Economic Developments and Prospects

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The World Economy

Growth in world gross domestic product (GDP) accelerated to 4.8 percent in 2000—one of the most impressive performances of the last two decades—but began to lose momentum in the latter part of the year as the US economy slowed. Sluggish US growth is expected to continue to at least the middle of 2001 before activity begins to pick up. In 2002, the world economy is forecast to strengthen and record a growth rate of around 4 percent. With the rapid economic growth in 2000 came an acceleration in the volume of international trade, rising by over 12 percent in that year, one of the strongest performances for many years. This rate will likely moderate to about 7 percent in 2001 as the pace of economic growth slows. Notwithstanding strong economic growth, world inflation remained low in 2000, maintaining a record for price stability set in 1999, when it declined to its lowest level in several decades. Inflation is ex-pected to remain moderate over 2001 and 2002.

Industrial Countries

GDP growth in the industrial countries accelerated to 3.8 per-cent in 2000, led by US growth of 5.0 percent. The euro area picked up to 3.4 percent as buoyant domestic demand was reinforced by export strength, particularly in the early part of the year. Japan recorded growth of 1.7 percent, up from the 1999 rate, led by private nonresidential investment and exports. In the UK, growth accelerated by nearly one percentage point to 3.0 percent in 2000, while in Australia growth fell slightly but still remained strong at around 4.3 percent. In Canada, growth was similar to that in the US.

Inflation in industrial countries picked up somewhat to a little over 2 percent in 2000, from 1.5 percent in 1999, prima-rily because of higher oil prices and slightly higher inflation in the US. Inflation was 2.4 percent in the euro area, a shade higher than in the previous year but generally subdued. Prices fell at a faster rate in Japan even as its economy recovered early in the year.

Stock markets were volatile in 2000. In the US, technology stocks weakened after reaching a peak in March as investors began to reevaluate earnings prospects and the outlook for further interest rate increases. Europe’s bourses also showed some weakness but this was less severe, due to the emerging strength of domestic demand and robust export performance. In Japan, stock prices were under downward pressure for most of the year, in part due to weakness in the technology sector.

In foreign exchange markets, the euro depreciated against the dollar up until late October before strengthening somewhat through the end of the year. During the year, both the yen and the dollar experienced slight real effective appreciation.

Unemployment rates either fell or remained stable in 2000 in most industrial countries. In the euro area, unemployment fell by nearly a full percentage point to 9.0 percent against the background of increased labor market flexibility and the pickup in growth. In the US, where unemployment was lower, the decline was more modest; but the rate fell to 4.0 percent, a rate not seen in over 30 years, reflecting the growth improvement early in the year. The unemployment rate remained steady in Japan as restructuring continued.

Short-term interest rates rose slightly in most industrial countries over the year. The US Federal Reserve raised short-term rates in the first half of 2000, as did the European Central Bank. Long-term interest rates remained relatively low, ref-lecting a benign view of long-run inflation and, in some coun-tries, strong budgetary positions.

Helped by continued strong revenue performance in the last few years, fiscal positions in most industrial countries improved further in 2000. The US federal surplus grew to around 2 percent of GDP in 2000 from about 1 percent in 1999, while the euro area also had a small surplus compared with a deficit of more than 1 percent of GDP in 1999. For the Organisation for Economic Co-operation and Development (OECD) as a whole, the central government budget switched from a deficit of about 1 percent of GDP in 1999 to a surplus of 0.5 percent of GDP in 2000. Conversely, the central govern-ment deficit widened further in Japan.

International imbalances increased further in 2000 as the US continued to grow more rapidly than other major industrial countries. In particular, the US current account deficit widened to almost 4.4 percent of GDP but was easily financed by strong capital inflows from the rest of the world. Interest rate differen-tials between the relatively high rates in the US and the lower rates in other industrial countries persisted and even widened slightly over the year. The US continued to serve as a safe haven for some capital flows from developing countries.

The near-term outlook for industrial countries is domi-nated by the anticipated slowdown in US growth to less than 2 percent in 2001, followed by an upturn in 2002. In the euro area, growth is expected to moderate slightly in 2001 and 2002 but to remain relatively strong. In Japan, the outlook is for continued growth of 1–2 percent, with the momentum sustained by restructuring—intended to increase efficiency and improve resource allocation—and by fiscal and monetary support. The unemployment rate should continue to fall in the euro area but may level off or increase slightly in Japan and the US. Reflecting the global slowdown, industrial countries’ infla-tion is expected to generally remain subdued or soften.

Transition Economies

The transition economies of central and eastern Europe in 2000 continued the economic recovery that began in the preceding year. Output growth was strong, accelerating to 5–6 percent, thanks partly to faster growth in the euro area and the revival in domestic demand in some of the transition economies. Sup-portive macroeconomic policies, including lower interest rates, some fiscal stimulus, and strong export performance, fueled growth of over 7 percent in the Russian Federation, 4–6 percent in Hungary and Poland, and 2.8 percent in the Czech Republic. Inflation was moderate in the Czech Republic but reached double-digit rates in Hungary, Poland, and particularly the Russian Federation, where it was just over 20 percent.

Aside from the Russian Federation, where the current account surplus improved to almost 20 percent of GDP as a result of higher prices for petroleum and metals, the external balance of these economies deteriorated somewhat in 2000. The current account deficit in Poland was around 6 percent of GDP and about 3.5 percent of GDP in both the Czech Republic and Hungary.

Growth in the transition economies is expected to remain relatively strong in 2001–2002 but more muted than in 2000. Much will depend on the progress in domestic economic reform and the external environment. Somewhat slower growth in the euro area, the major trading partner for these economies, will have a mild negative effect as will expected slower growth in the Russian Federation and a leveling off or slight decline in oil prices. The current account surplus is expected to narrow in the Russian Federation and the current account deficits in the other countries widen somewhat. Throughout this region, inflation should generally moderate as growth slows.

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