A Global Growth Rebound: How Strong for How Long?

Paper at the Global Economic Prospects conference Institute for International Economics Washington, DC

September 9, 2003

After a disappointing first half of 2003, the world economy is poised to rebound in the second half and continue with above-potential growth during 2004. The United States and emerging Asia will lead the global rebound, with Japan pulled along in the upswing. Respectable growth rates will continue in Canada, Australia, and Central and Eastern Europe. Growth in Latin America should pick up as Argentina continues to bounce back from the catastrophe of 2001/02, Brazil begins to recover from its recent recession, Mexico benefits from strengthening growth in the United States, and Venezuela halts its headlong decline toward economic oblivion.

In contrast, near-term growth prospects for Western Europe remain somewhat of a mystery: the hard data point to continued stagnation, reinforced by the effects of an extremely hot summer; but several key sentiment indicators (including rising equity markets) point to a significant strengthening of growth before year-end. Despite a remarkably stubborn European Central Bank (ECB), I am with the optimists and expect that real GDP growth will strengthen to 2 percent during 2004.

For the world economy (on a WEO-weighted basis), global economic growth should rise from barely a 2 percent annual rate during the first half of 2003 to about a 4 percent annual rate during the second half and continue at that pace during 2004.

Indeed, a strengthening of growth is already apparent in the US economy, where second quarter performance surprised on the upside and where the third quarter real GDP now appears likely to record better than a 4 percent annual rate of advance. Emerging Asia will also show a sharp strengthening of growth as several countries snap back from SARS-related slowdowns and other temporary problems that retarded economic activity last winter and spring. Although not robust, Japan’s positive growth performance during the first and second quarters surprised most analysts, and even justifies an upgrade in my (relatively) optimistic forecast from +1 percent to + 2 percent real GDP growth on a fourth-quarter-to-fourth-quarter basis. All of this implies that—provided that the economy of Western Europe does not defy all the normal patterns of cyclical behavior—global economic growth will strengthen significantly over the next few of quarters.

This presumption, and the assumption that global growth will continue at a respectable pace through most of next year, is reflected in the summary of the global growth forecast in the table below and in the more detailed table at the end of this policy brief.