CHAPTER 1 The Setting: World Economic Developments in FY2OO1
- International Monetary Fund
- Published Date:
- September 2001
The global economy in 2000 grew at its fastest pace in over a decade and a half, bolstered by the continuing strong performance of most advanced countries and a substantial pickup in growth in other regions of the world, particularly in the Western Hemisphere, Middle East, and countries in transition (Table 1.1 and Figure 1.1).1 The pace of global economic growth moderated in late 2000 and early 2001, however, led by a slowdown in the advanced economies—especially the United States—and moderating growth in a number of emerging market countries.
|Major advanced economies||1.3||3.1||2.3||2.7||3.3||2.8||3.0||3.8|
|Other advanced economies||1.9||4.6||4.3||3.8||4.2||2.2||4.8||5.2|
|Newly industrialized Asian economies||6.4||7.9||7.5||6.3||5.7||–2.4||7.9||8.2|
|Middle East, Malta, and Turkey||3.3||0.3||4.3||4.8||5.4||3.6||0.8||5.4|
|Countries in transition||–7.5||–7.6||–1.5||–0.5||1.6||–0.9||2.6||5.8|
|Central and eastern Europe||0.3||3.5||5.5||4.0||2.5||2.1||1.8||3.8|
|Commonwealth of Independent|
|States and Mongolia||–10.9||–13.3||–5.5||–3.3||1.0||–2.8||3.1||7.1|
|World trade volume (goods and services)||3.7||9.0||9.1||6.5||10.1||4.2||5.3||12.4|
|Countries in transition||7.6||4.2||11.6||7.6||11.5||0.8||–7.3||13.3|
|Countries in transition||4.5||1.0||9.7||4.8||5.8||4.7||0.6||14.9|
|In U.S. dollars||–11.8||–5.0||7.9||18.4||–5.4||–32.1||37.5||56.9|
|Nonfuel (average based on world commodity export weights)|
|In U.S. dollars||1.8||13.4||8.4||–1.2||–3.2||–14.7||–7.1||1.8|
|Countries in transition||634.3||274.2||133.5||42.4||27.4||21.8||43.9||20.1|
|Six-month London interbank offered rate (LIBOR, percent)|
|On U.S. dollar deposits||3.4||5.1||6.1||5.6||5.9||5.6||5.5||6.7|
|On Japanese yen deposits||3.0||2.4||1.3||0.7||0.7||0.7||0.2||0.3|
|On euro deposits||7.4||5.7||5.7||3.7||3.5||3.7||3.0||4.6|
Indonesia, Malaysia, the Philippines, and Thailand.
Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil.
Indonesia, Malaysia, the Philippines, and Thailand.
Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil.
Figure 1.1World Indicators
Source: IMF, World Economic Outlook (May 2001). Weighted average. See Statistical Appendix to the World Economic Outlook for details
1 Goods and services, volume.
“Headline” inflation (including energy and food) edged up in the advanced economies, reflecting higher energy prices and strong economic activity, but fell in the developing countries and countries in transition. Fiscal imbalances were reduced in the major regions of the world but external imbalances remained a source of concern in some countries. Financial flows to emerging market economies continued to recover in 2000, although the cost of financing increased in the final quarter of the year as international market conditions tightened. Buoyant world demand supported strong growth in the volume of trade, both in advanced economies and, especially, in developing and transition economies.
Other key developments during 2000 and early 2001 included the sharp fall in the major equity markets, particularly in the United States; problems with two important emerging market borrowers, Argentina and Turkey; and a retreat of oil prices from their late 2000 high. U.S. equity markets fell during most of 2000 and early 2001, reflecting weak corporate earnings reports, a downward revision of technology valuations, tightening credit conditions, and increased expectations of a U.S. slowdown. This fall was mirrored in other mature equity markets and spilled into emerging markets. Spreads on emerging market bonds widened in the last quarter of 2000, driven by tighter external liquidity conditions worsened by concerns about the economic and financial situation in Argentina and Turkey. Global liquidity conditions improved in early 2001, partly as a response to cuts in U.S. interest rates that began in January. Conditions tightened once again in March, however, largely reflecting the growing financing problems in Argentina. Oil prices increased from the second quarter of 2000 through to November but then eased, partly because of the global slowdown. The outlook for oil prices and production, however, remained highly uncertain.
Output growth strengthened in the developing countries as a group in 2000, fueled by buoyant exports as well as recoveries in domestic demand. Economic growth picked up strongly in Latin America, the Middle East, and, to a lesser extent, in Africa and in developing Asia. The buoyancy of the Latin American economies was aided by strong U.S. demand and recoveries in domestic demand from the depressed levels of 1999. In 2000, sharp terms-of-trade improvements and increases in oil production quotas of the Organization of Petroleum Exporting Countries (OPEC) boosted output growth in the Middle East to rates not seen since the early 1990s. Continued strong growth in China and India supported the economic improvement in Asia as a whole.
Following a period of economic growth at or above potential, activity in the advanced economies weakened late in 2000, led by a sharp slowdown in the United States, stalling recovery in Japan, and moderating growth in Europe. After annualized growth of 5½ percent in the second quarter of 2000, economic expansion in the United States slowed sharply during the rest of the year—with GDP growing by only 1 percent (annualized) in the fourth quarter. This slowdown was a result, in part, of the tightening of monetary policy during the year, and also of higher oil prices and the decline in equity markets, including a sharp fall in the NASDAQ. Weighed down by low consumer confidence, slowing business investment, and weakening external demand, economic growth in Japan failed to sustain the strong performance of the first quarter of 2000. Output growth in Europe increased further relative to the previous year, registering its strongest expansion since the late 1980s. Growth eased during the latter part of 2000 and in early 2001, however, apparently in response to the impact of higher oil prices on purchasing power, weaker business confidence, and spillover effects of the U.S. slowdown.
In commodity markets, oil prices continued to increase during most of 2000, paced by strong energy demand and supply constraints, before easing in December and in early 2001. To contain oil prices within its $22–$28 reference range, OPEC announced plans to cut oil production. Spot prices stayed volatile, reflecting uncertainties about the extent and duration of the global economic slowdown, and also about oil production prospects and the political situation in some parts of the Middle East. Nonfuel commodity prices remained in a slump, rising little from their depressed level of 1999—especially when measured in U.S. dollar terms. The largest changes were in prices of metals and timber. Metals prices, after firming slightly in the third quarter of 2000, fell back. Food prices increased late in 2000 but also declined subsequently. In addition to a fall in coffee prices, the beef market was hurt by health concerns, particularly in Europe, and cereals stocks remained high relative to consumption. During early 2001, weakening global demand put further downward pressure on commodity prices.
World trade volumes rose sharply in 2000, particularly early in the year. Imports to the advanced economies grew at double-digit annual rates as demand growth picked up in North America and Europe. Imports to developing countries also grew strongly, especially in developing Asia, the Middle East, and the Western Hemisphere. Rapid consumption and investment growth in the largest countries of these regions fueled the increase in demand for imports.
Capital flows to emerging market economies surged in 2000, although remaining below the peak levels of 1997. The flows were mostly in the form of syndicated lending and equity investment. Syndicated lending in 2000 rose well above the volumes of the previous two years, buoyed by lending to sovereign or quasi-sovereign entities. Asian and Western Hemisphere countries received more than half of these loans, with Hong Kong SAR, Taiwan Province of China, Korea, Malaysia, Mexico, Chile, and Brazil receiving the largest shares. Although it faced financial crisis, Turkey also obtained much-needed private external financing. Sizable volumes of lending were channeled to the telecommunication and energy sectors, the latter reflecting continued high prices of oil and natural gas. Despite sharp drops in emerging equity markets, particularly in technology sectors, equity issuance placements set a new record in 2000. Asia was the dominant issuer—particularly China, which accounted for about half of total international equity issuance by emerging markets and for 85 percent of all issues in the last quarter. China listed three large companies in the energy and telecommunications sectors in 2000, with the equity issue of China’s mobile telecom being the largest-ever equity placement in Asia, excepting Japan.
In the last quarter of 2000, financing conditions for emerging market borrowers deteriorated, with spreads widening across the board, in tandem with developments in U.S. high-yield paper. Concerns over external financing problems in Argentina widened its spread to more than 1,000 basis points in the latter part of March 2001, and Turkey’s spread also remained large.
While dollar- and euro-denominated interest rates rose for short-term maturities in 2000, partly because of a tightening of monetary policy in North America and Europe, long-term rates fell or remained constant. As long-term U.S. government bond yields fell, corporate credit spreads widened from mid-2000 and spreads between risk classes showed greater differentiation, notably the high-yield market. With mounting evidence that private investment and consumption were slowing, the Federal Reserve began to cut interest rates in early 2001 for the first time since late 1998. With headline inflation in Europe remaining above the target ceiling, the European Central Bank kept interest rates at their late 2000 levels through the first quarter of 2001. In an attempt to boost financial sector liquidity, in March 2001 the Bank of Japan in effect returned to a zero-interest-rate policy and adopted a framework for further monetary stimulus; as a result, both overnight interbank interest rates and longer-term bond yields edged down.
In currency markets, an apparent misalignment persisted among major currencies, particularly the euro and the U.S. dollar, associated with ongoing large external imbalances among the largest economies. The U.S. dollar strengthened against the euro in early 2001 and both the U.S. dollar and the euro firmed against the yen. While the dollar’s strength may have reflected investors’ perceptions of a relatively strong growth outlook for the United States over the longer term, the appreciation of the dollar appeared at odds with the need to reduce external imbalances to more sustainable levels. The strength of the U.S. dollar was also reflected in a fall in the dollar/sterling exchange rate in 2000, declines in the Australia and New Zealand dollars to record-low levels, and downward pressures on some emerging market currencies.
Key Developments in Emerging Market and Advanced Economies
Output growth in emerging Asia picked up in 2000 as this region continued its recovery from the 1997–98 crisis. The pace of economic expansion, however, slowed from mid-2000, largely as a result of the U.S. slowdown, higher oil prices, a decline in regional equity markets, and, in some countries, concerns about delays of corporate and financial restructuring and a decline in electronics exports. The effects of these influences varied across the region. For example, in China and India—which account for three-quarters of regional output—economic activity remained well sustained (providing an important source of stability). At the same time economic activity slowed more markedly in countries where recovery from the earlier crisis was relatively advanced, such as in Korea, Singapore, and Malaysia.
In Latin America and the Caribbean, economic activity continued to recover in 2000 as a whole, spurred by strong U.S. growth in the first half of the year, increased domestic demand, and—for some countries—higher oil prices. Performance differed across the region, however, with strong growth in Mexico, Chile, and Brazil, a moderate pickup in the Andean region, and very weak activity in Argentina. Despite rapid export growth, the regional current account deficit improved only slightly, reflecting a strong rebound of imports. Toward the end of the financial year, Mexico and a number of countries in the Andean region and Central America were affected most by the U.S. slowdown; Brazil and Argentina, with weaker trade links to United States, were more moderately affected. The late-2000 crisis in Argentina overshadowed other developments in the hemisphere. The Argentine economy came under increasing pressure in 1999 and 2000 following large terms-of-trade losses, the floating of the Brazilian real, increases in international interest rates, and the firming of the U.S. dollar. Economic activity in Argentina stagnated as domestic demand weakened under the influence of deflation and a fall in international investor confidence leading to a deterioration in external financing conditions—including a widening of Argentina’s bond spread. The authorities responded by introducing several measures to strengthen the fiscal position and make product and labor markets more flexible.
Economic growth in Africa strengthened somewhat in 2000 although in many countries it remained insufficient to raise average per capita incomes. And the pickup remained fragile and highly dependent on the evolution of commodity prices. Output growth in South Africa recovered from a series of adverse shocks, including higher oil prices, unfavorable weather conditions, and contagion from the crisis in Zimbabwe. Despite high oil prices, the oil-exporting countries experienced only a modest pickup in real activity, a result of structural weaknesses and, in some cases, political instability and armed conflict. In much of the rest of Africa, the deterioration of the terms of trade was absorbed through lower domestic demand and weaker growth, thereby preventing these countries from reaping the benefits of their reform efforts. Conflicts or domestic political turmoil in some cases contributed to a weakening of macroeconomic policy and performance. For many countries in the region, HIV/AIDS has become the major threat to development. Although some countries increased their HIV/AIDS-prevention efforts, a more concerted effort at prevention and treatment, together with increased international support, will be needed to combat the pandemic. More generally, ongoing debt relief and increased official development assistance would help to spur growth in Africa.
Economic activity in the Middle East surged in 2000, boosted by strong oil prices and increases in OPEC oil production quotas. The volatility of oil prices, however, underscored the need to promote economic diversification to achieve sustained growth. Output growth in the Mashreq region (Egypt, Jordan, Lebanon, Syria, and the West Bank and Gaza Strip) picked up, particularly in Egypt. Growth in Israel also rebounded strongly in 2000, led by buoyant technology sector exports, but declined late in the year, affected by both the global high-technology slowdown and the deterioration in the security situation.
Growth also strengthened in European emerging market economies. Still, persistently high inflation and wide external imbalances remained problematic in a number of these countries. In Turkey, growing problems in the banking sector and a widening of the current account deficit led to a financial and currency crisis in late 2000. In response, the authorities strengthened their economic program in December, including by adopting tighter macroeconomic policies and accelerated structural reforms. However, political difficulties and delays in the privatization program contributed to an erosion of investor confidence and to a renewed crisis in February 2001, leading to the authorities’ decision to allow the currency to float.
Economic growth in the advanced economies was strong for much of 2000 but weakened later in the year and in early 2001. Following a strong start, growth in the United States slowed during the year in response to the increase in oil prices, the drop in equity markets, tightening credit conditions, and the U.S. dollar appreciation. The downturn was most severe in manufacturing production. The external current account deficit widened in 2000, driven by the strength of private investment and the continued decline in household saving. In Japan, economic recovery stalled, reflecting persistent weaknesses in the financial sector and consumer confidence, together with the slowdown of the global economy. This setback, against the background of the prolonged economic stagnation in Japan, again highlighted the urgency of structural reforms to put Japan’s financial and corporate sectors on a sounder footing. The European Union grew strongly in 2000, with the largest economies—Germany, France, Italy, and the United Kingdom—all growing by about 3 percent, with declining unemployment. Signs of weakness emerged late in the year, although these were not consistent across the region: for example, industrial production growth and business confidence declined in Germany, while activity and confidence in France appeared to be relatively well sustained. In Australia and New Zealand, economic activity continued to be supported by rapid export growth, underpinned by competitive exchange rates and relatively strong external demand.