World Economic Outlook:After two years of crisis, report upgrades global assessment of performance and prospects

• Pages: 334-336

Page 334

Mussa: For the first time in two years, the World Economic Outlook is reporting an upgraded assessment of global economic performance and prospects. We now anticipate that real GDP growth in the world economy this year will be 3 percent-7/10 of a percent above the estimate of the May World Economic Outlook-and growth in the world economy will strengthen further next year to 3.5 percent. A year ago, the financial market turbulence after the Russian default and the Long-Term Capital Management difficulties created a bit of tension in the global economy. Due in part to timely policy actions by the world's leading central banks, those difficulties were overcome. That is an important reason why we are looking at a more favorable performance in recent months and a solidification of prospects for a more favorable performance going forward.

The U.S. economy, of course, has continued to perform quite strongly, and we anticipate U.S. growth will hold up very well through the end of this year and slow down somewhat next year. One question is how much it will slow down and what maybe needed if it does not slow naturally. In Japan, a recovery is now under way, but there are risks that it could be knocked off course if the yen appreciates substantially from recent levels. But the basis for recovery has been set, and the outcome next year could exceed our and others' forecasts if policy remains appropriately supportive of recovery in the near term. In the euro area, we are seeing increasing signs that growth is beginning to pick up after the slowdown late last year and early this year.

In emerging markets, the Asian crisis economies- with the exception of Indonesia-are giving increased signs of strengthening growth performance, most spectacularly in Korea. Latin America clearly is suffering a difficult year, but we expect a bottoming-out by the end of the year and an upturn in growth next year. Emerging market economies more generally are still under tension from the sharply reduced flow of private capital. This tension, if anything, is picking up in light of Y2K concerns. But we expect these difficulties will be overcome. Larsen: I would like to highlight two issues in the World Economic Outlook: safeguarding macroeconomic stability at low rates of inflation and Y2K issues. The achievement of approximate price stability in much of the world in the 1990s is a major accomplishment. But in quite a few cases, price stability itself has not appeared sufficient to ensure strong, sustained growth. It is still a challenge to avoid macroeconomic and financial instability. The report particularly discusses the policy challenges when prices of currently produced goods and services are stable, but asset prices are rising strongly.

We take the Y2K issues very seriously at the IMF. The IMF has been studying closely the potential consequences for our member countries and for financial markets, and this work is described in an appendix to Chapter I. Even on relatively pessimistic assumptions, the results of our contingency scenarios suggest that the consequences of Y2K problems should be manageable in most cases. We do recognize, however, that there could be some pressures and problems because of the fear of possible problems...