Body
The global economic recovery is continuing but at a somewhat slower pace than was anticipated six months ago. Specifically, using the country weights from the IMF’s World Economic Outlook, the fore-cast for real GDP growth in the world economy during 2002 (i.e., on a fourth-quarter-to-fourth-quarter basis) is cut by about half a percentage point to 3 percent—a pace that is slightly below my estimate of the potential growth rate for world GDP.1This downward revision reflects primarily slower growth than earlier expected during the first half of 2002 in most industrial countries and the expectation that growth will remain somewhat more sluggish than earlier expected at least through year-end. For 2003, the forecast for global economic growth is also cut by about half a percent-age point—to 4 percent—reflecting both general factors suggesting slightly weaker performance in many industrial and developing countries and the particular economic risks arising from possible military action against Iraq and from potential credit events affecting key developing countries. Despite these downward revisions, however, there is little doubt that the world economy will see significant improvement this year from the 1 percent growth recorded in 2001, and it is still reasonable to expect further improvement to a growth rate modestly above global potential during 2003.
Slower than anticipated recovery during the first half of 2002 was particularly apparent in the industrial countries, especially the three largest industrial countries; and the main issue for global growth prospects is whether this performance will improve going forward. For the United States, the key questions are how well will the growth of consumption spending be sustained in the face of relatively weak employment gains and falling equity prices, but rising real estate values and very low interest rates? (2) when and to what extent will gains in business fixed investment takeover from recovery of inventory investment as a principal driver of domestic demand? and (3) in the face of a somewhat weaker dollar, how much will further deterioration of US net exports weigh on US GDP growth? For Western Europe, the main question is what will stimulate a somewhat more rapid pace of domestic demand growth, especially in view of the apparent unwillingness of the key monetary authority to supply further stimulus and the constraint on fiscal expansion implied by the Growth and Stability Pact and by longer-run concerns about the fiscal situations of most Western European governments? For Japan, the main question is much the same as for Western Europe—only much more pressing because of the very limited room for stimulative policy and because of the concerns about the fragilities of the financial sector and the urgent need to pursue critical structural reforms to lay a foundation for sustained growth? For those industrial countries that have performed somewhat better than expected, notably Australia and Canada, the question is how long this superior performance can be sustained if there is no strengthening of growth in the largest industrial countries?