The economic situation both world-wide and in the OECD area now appears more satisfactory than six months ago. World financial markets have calmed down, fears that the Russian crisis would have repercussions elsewhere have not been realised, and the Brazilian crisis has remained confined to the region. With the recovery taking hold in the emerging Asian economies and the situation in the other non-OECD regions starting to stabilise, world growth is set to remain moderate in 1999, at around 2.5%, rising to 3% next year.
In this general context and if there is no further turbulence in financial markets, OECD-wide growth should be around 2.25% in 1999 and 2% in 2000. However, the outlook varies across the main regions. In the United States, economic activity has remained exceptionally buoyant, with fast growth, low unemployment and no sign of inflationary pressures. The main question is whether the US economy can continue for much longer to operate at this level(see article). High stock market capitalisation ratios, very low household saving and a growing deficit on the current account are all signs of growing imbalances in the US economy. Output growth is set to be around 3.5% this year and activity should slow to about 2% in 2000.
Depressed by the sluggishness of exports and low business confidence, growth in the European Union should accelerate, buoyed by the pick-up in consumption and the gradual recovery of export markets in the countries hit by the financial crisis. It could average 2% this year and about 2.5% in 2000. However, the cyclical situations of the countries in the euro area will continue to diverge widely, with the production gap narrowing sharply or disappearing in most countries, but remaining large in Germany and Italy. The unemployment rate in the European Union should fall to 10%, the lowest level recorded since the period prior to the recession at the start of the 1990s.
In Japan, the recession worsened in the closing months of 1998, but there have been a few positive signs recently which suggest improvements lie ahead. For now, though, the continuing restructuring of the corporate sector precludes a revival of domestic demand in 1999 and real GDP could fall by about 1% before stabilising in 2000.
The prospects for the rest of the OECD are mixed. Canada, Australia, Greece, Hungary, Island, Poland and Sweden should continue to enjoy strong growth, although it will tend to slow slightly in some cases. Activity should pick up in Korea, and the recovery in the New Zealand economy, after the recession last year, should gather pace. In contrast, the United Kingdom, Norway, the Czech Republic and Turkey will experience slight or no growth this year, and activity will slow in Denmark to well below its potential rate. Outside the OECD, economic performance has been varied, and the short-term outlook is hardly encouraging, even though an improvement is forecast for 2000. The situation seems to have stabilised in the emerging economies but in most of the countries affected by the crisis the recovery is likely to be only gradual next year; in China, growth should slow somewhat while still remaining high. Elsewhere, Brazil's real GDP is contracting, which should have negative consequences for the rest of Latin America, while in Russia, output is set to go on fallng this year. For the moment, the direct economic impact of the conflict in Kosovo seems limited, though some uncertainty may remain.
Risks of renewed turbulence exist in some emerging economies. The Brazilian situation could deteriorate again; the economic conditions in Russia could worsen, with effects throughout the region; and the slowdown of the Chinese economy could be more lasting than initially anticipated.
Surplus capacity and weak demand in the emerging markets will keep downward pressure on world prices, though the chances of world-wide deflation appear to have receded.
©OECD Observer No 217/218, Summer 1999