this background, the World Economic Outlook projects global growth of 3¼ percent
in 2003—¼ of a percentage point higher than in 2002—and 4 percent in 2004:
In the United States, recent economic data have been disappointing,
and growth this year is expected to be somewhat weaker than in 2002. But once
current geopolitical uncertainties have been resolved, a recovery in confidence
and investment, together with additional fiscal stimulus, should underpin stronger
growth from the second half of 2003. The continued impressive productivity performance
of the U.S. economy also bodes well for the future.
continued to disappoint in the euro area where domestic demand remains
weak. Forecasts have been revised down sharply, and only a modest pickup in growth
is now expected in 2003 as balance sheet strains, excess capacity, the appreciation
of the euro, and fiscal policy tightening in a number of countries are all likely
to weigh on the economy going forward. Within this overall picture, the situation
in Germany is particularly worrisome.
In Japan, recent indicators
suggest that the recovery that begun in early 2002 is now slowing. GDP growth
in 2003 is expected to be weak as investment and consumption remain subdued in
the face of the large imbalances in the corporate sector and the uncertain employment
outlook. Moreover, deflation continues, and survey evidence suggests that deflationary
expectations are becoming more widespread and persistent.
market economies, growth prospects for 2003 have been revised down slightly,
in part because of the weaker outlook in advanced countries and higher oil prices,
but also because of the uncertain external financing environment:
Latin America, economic and financial conditions are stabilizing in response
to determined efforts in many countries to address vulnerabilities. Activity has
begun to turn up following the deep recession in 2001-02 as the substantial real
exchange rate depreciations in the region have boosted net exports. Financial
market indicators have generally strengthened since October 2002, although financing
conditions remain difficult for some sub-investment grade borrowers. Nevertheless,
the outlook remains fragile across the region. The policy frameworks in a number
of countries, including Argentina, still need to be strengthened substantially,
while the political crisis in Venezuela has had a serious impact on activity.
in emerging Asia exceeded expectations in 2002, particularly in China,
and is expected to remain robust in 2003. However, the renewed slowing in the
global IT sector will, if sustained, have an adverse impact on growth; while domestic
demand has generally strengthened, it is still not sufficiently robust in most
countries to support a self-sustaining recovery.
and eastern Europe and the Commonwealth of Independent States, GDP
growth has remained solid, underpinned in the former by strong foreign direct
investment inflows as EU accession nears and in the latter by rising oil prices
and stronger domestic demand. In Turkey, GDP growth has exceeded expectations,
but the outlook has recently become more difficult in light of recent policy slippages
and the geopolitical situation. To improve confidence, the government needs to
adhere strictly to the commitments agreed in the new Letter of Intent.
the Middle East and Africa, growth is expected to pick up in 2003
as many countries benefit from higher commodity prices and improved policy implementation.
Regional security concerns and conflicts, however, present serious risks to the
outlook, while stronger growth in a number of African countries will depend critically
on an early improvement in weather conditions.
remains the most likely development and represents a realistic basis for our policy
discussions. The risks and uncertainties surrounding this outlook, however, are
The conflict in Iraq remains a significant source
of uncertainty, which could persist for some time.
recovery continues to depend heavily on the United States. This reliance on the
United States has also contributed to the widening of global imbalances, and while
these may adjust in a benign fashion, a disorderly adjustment—involving a sharp
depreciation of the U.S. dollar—remains a risk.
of further declines in mature equity markets cannot be ruled out. While forward-looking
price earning ratios are now close to historical averages, and earnings expectations
have fallen back from earlier optimistic levels, it remains possible that—after
a long period of overvaluation—markets could overshoot on the downside. An adjustment
in house prices in some industrial countries is also possible.
in a number of emerging market countries remain high, making them susceptible
to any deterioration in the global environment.
Against this background,
policymakers face considerable uncertainty, and they will need to remain flexible
and adapt quickly to changing circumstances. With inflationary pressures in general
quite moderate, monetary policies in major industrial countries should remain
accommodative, and there is scope for further easing should it be needed. In the
United States, policy is appropriately on hold for the time being, while in the
euro area rates were cut by 25 basis points in March; if incoming data were to
suggest recoveries were faltering, additional monetary easing should be considered.
In Japan, more aggressive monetary action is required to arrest deflation. With
regard to fiscal policy, the situation differs between countries, but the room
for maneuver in many is limited by the high levels of public debt. The automatic
fiscal stabilizers, however, should be allowed to operate fully.
emerging market countries experiencing external financing difficulties, macroeconomic
policies must continue to aim at rebuilding confidence; elsewhere—particularly
in many countries in Asia—there is more room for policy maneuver in response
to adverse shocks. A number of countries—including some of those that are among
the world's poorest—could be seriously affected by any deterioration in the global
environment, and additional assistance from the international community may be
necessary in some cases.
Attention is inevitably and appropriately focused
at this stage on the consequences of the war, but it is important that critical
medium-term policy issues are not forgotten.
A greater sense of
urgency is needed in implementing policies to reduce global dependence on the
United States and to foster an orderly reduction in global imbalances over the
medium term. This will require a broad-based effort that includes: aggressive
steps to address the serious corporate and financial problems in Japan; the energetic
acceleration of labor and product market reforms in Europe; the reestablishment
of a sound medium-term fiscal position in the United States; and a shift from
external to domestic sources of growth in emerging Asia through additional financial
and corporate reforms (in China, greater exchange rate flexibility is also desirable).
The broader such efforts, the less the burden will be on individual countries
or regions, and the better the prospect for an orderly resolution of existing
Fiscal consolidation remains a central medium-term
priority around the globe. In the industrialized world, public debt is already
very high in Japan and some parts of the euro area, and almost all countries face
mounting pressures from aging populations. While the scope for short-term tightening
is inevitably constrained by the current cyclical situation, additional action
to ensure medium-term sustainability is required in many cases including by reforming
pension, health, and benefit systems. In emerging markets, the size and structure
of public debt are significant sources of macroeconomic vulnerability in Latin
America, and public debt accumulation is also increasing in some countries in
emerging Asia, including India and China. The key priorities include civil service
reform, broadening tax bases and improving tax administration, strengthening governance,
and reducing contingent liabilities.
Among the poorest countries,
the priority remains to implement policies to reduce poverty and to make progress
toward meeting the other Millennium Development Goals. This will require, among
other things, an enduring increase in GDP growth, which—particularly in sub-Saharan
Africa—remains well below the levels necessary to achieve these goals. As stressed
in the New Partnership for Africa's Development (NEPAD), this will require action
in a host of areas including restoring peace and political stability, improving
governance, infrastructure, health and education, liberalizing markets, including
trade, and addressing the HIV/AIDS pandemic. Let me highlight three key issues.
Institutional reform is of great importance in developing countries. The quality
of domestic institutions plays a key role in explaining differences in income
levels, growth rates, and growth volatility across countries, as the latest World
Economic Outlook highlights. Developing countries could significantly increase
their per capita income if they improved the quality of their institutions, while
maintaining sound macroeconomic policies. (The accompanying figure, taken from
the World Economic Outlook, shows the estimated increase in per capita
GDP for a number of regions if the quality of their institutions was improved.
For example, real GDP per capita in sub-Saharan Africa could be 80 percent higher
if its institutions were on par with those in developing Asia and 250 percent
higher if they were of the same quality as the global average).
efforts of the poorest countries to improve their economic management and institutions
must be accompanied by additional assistance from industrial countries. Despite
recent welcome increases, aid flows from most countries are still well below the
UN target of 0.7 percent of GNP.
Rapid action is required to improve
access for the poorest countries to industrial country markets, particularly in
agriculture. In this connection, it is unfortunate that multilateral trade negotiations
under the Doha Round appear to be falling behind schedule, and all parties need
to make renewed efforts to address key road blocks to further progress, especially
in the areas of agriculture and public health. Indeed, progress in addressing
these issues before or at the upcoming WTO Ministerial meeting in Cancun could
play a critical role in rebuilding global confidence.
we face a situation of uncertainty and risk. In jointly defining our policies,
our overriding priority must be to strengthen cooperation and restore confidence
to the global economy. A cooperative approach requires the advanced economies
to vigorously gear their policies toward growth, while strengthening international
collaboration that has served us so well in the past. We have policy options—let
us seize them.