PRESS BRIEFING ON WORLD ECONOMIC SITUATION

Press Briefing

PRESS BRIEFING ON WORLD ECONOMIC SITUATION

At a Headquarters press briefing this morning, a team of United Nations economists introduced a note of the Secretary-General on The World Economy at the Beginning of 1998 forecasting a picture of global economic growth despite the current financial crisis in South-East Asia. The note will be submitted to the 1998 organizational session of the Economic and Social Council.

The Director of the Macroeconomics Division, Department of Economic and Social Affairs, Ian Kinniburgh, was joined by the Chief of the International Economic Relations Branch, Barry Herman, and by an Economic Affairs Officer, Wenyan Yang.

Mr. Kinniburgh said that the world economic outlook was dominated by the unprecedented world economic situation in South-East Asia. That situation had introduced a great deal of uncertainty into all economic forecasting, and impacted on the rest of the world because of the integrated nature of today's world financial markets. Global financial integration made forecasting particularly difficult, as it was far less dependent on what economists call "fundamentals" and more dependent on developments in financial markets. Also difficult to judge was confidence, one of the key ingredients in financial markets. And that confidence, which the world economy was trying to regain, would be critical to financial outcomes over the next year.

The net effect of the South-East Asian crisis had been negative for the world economy as a whole, but not drastically so, he continued. It had resulted in a decrease of approximately 0.2 per cent in the rate of growth of world output for next year compared to the prediction of three or four months ago. The effect on world growth was not astronomical primarily because the strong underlying momentum of the world economy largely offset the setbacks in South-East Asia.

Mr. Kinniburgh said that in Europe, for example, some acceleration in the larger economies was predicted for next year, including in Italy, France and Germany. To the east, some growth was anticipated for those economies in transition. Among the developing countries, including in Asia, rather healthy rates of economic growth were expected again next year in both India and China. Some slowdown was forecast in Brazil and Argentina. But even Argentina would maintain a rather high growth rate. The African region was expected to improve. At the same time, the affected economies in South-East Asia had been rather strong in recent years, and the underlying fundamentals were believed to be sound. The unknowns would be the effect of the crisis within the economies themselves, and the extent to which the crisis would spread to the rest of the world.

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With those uncertainties, governments should not be too restrictive in their economic policies, he said. Within the countries themselves, slowing down economic growth excessively was hardly the way to build confidence. Countries elsewhere, in what was known as "beggar-thy-neighbour policies", had to bear in mind that their actions could have wider consequences. Excessively restrictive policies would only aggravate the potential downside risks. Looking ahead to the far longer term, it was difficult to draw too many lessons from the South-East Asian crisis.

A correspondent sought further information on the health of China's economy. Ms. Yang said that there was a rather optimistic forecast for China in 1998, with growth expected to range from 9.3 to 9.5 per cent. So far, China had not been seriously affected by the financial crisis in South-East Asia. China was undertaking measures to strengthen economic growth, including reducing interest rates and lifting the credit caps, by which the banks could lend money to businesses. That was exactly the opposite from what was occurring in South-East Asia, where there was a credit crunch.

Of course there were downside risks to the forecast concerning China, including a worsening of the situation in South-East Asia, she added. The impact on China was mainly going to occur through trade. Even under the current circumstances, China's exports were expected to slow down in 1998 because it exported heavily to South-East Asia. In addition, the fact that Chinese currency was not devaluating along with the other currencies affected the relative competitiveness of China's exports. But, given that China was a large country with very strong internal momentum for economic growth, it was likely that such growth would be determined more by domestic factors than external ones.

Another correspondent asked how the team foresaw the role of the International Monetary Fund (IMF). Mr. Herman said that presently there really was no alternative to adopting austere policies. The economic system was designed in such a way that countries needed credit, and they needed confidence to get the credit. The markets favoured austere fiscal and monetary policies in order to gain confidence. The market forgave almost everything, up to a point when it forgave nothing. Malaysia, for example, had recently announced the adoption of austere policies, cutting back on government expenditures. Like all countries, Malaysia needed to make adjustments. If the announcement of austerity policies there and in other countries was successful, then those countries would return to the markets shortly. That was the lesson of Mexico, and it was the expectation now.

The IMF was necessarily implementing a policy for the international community, he went on. The austerity may not be long-lived, but in the middle of the game, a country had no other choice. When the dust settled, there should be some international analysis concerning the rate at which countries liberalized their external accounts, as well as the sequencing and kinds of protections that countries needed before opening themselves up to that kind of game. The United States had experienced a major financial crisis with the

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savings and loan scandal, but that had hardly affected the United States economy. But when the financial system of a developing country had a financial crisis, the whole country had to respond with an austerity programme to regain confidence. Ultimately, stronger financial systems were needed in such countries, which should not be so open until their financial systems were more robust.

To a further question concerning the IMF, Mr. Herman drew attention to the events this year in Thailand, where many businesses had obligations in dollars, but incomes in local currencies, or baht. No one thought the baht would ever be devalued, but once that became a possibility, businesses hedged by securing early payments in tune with the new exchange rates. That hedging, in an attempt to avoid risk, had the same effect on the market as speculation -- borrowing baht, changing it into dollars, and hoping the exchange rate would fall in order to change back to baht and "make a killing" in the market. Both hedging and speculation were moving money. It was impossible to know where the market ended and where the IMF began. The IMF's main job was to help restore confidence in the countries, he noted.

What would happen if the euro developed into a second alternative currency, another correspondent asked. Mr. Kinniburgh said that a number of years ago, there was the sense that the yen was developing into an international currency. Relying on a single currency internationally was not a good idea, and it would be wise to expand the number of truly international reserve currencies in the global market.

To a question about the United Nations forecast for the United States economy in 1998 and the impact on that country from the South-East Asian financial crisis, Mr. Kinniburgh said that the American economy was extremely strong this year, having grown by some 3.25 per cent, well above its long-term sustainable trend. However, it could not keep going at that rate without "overheating". A slowdown to more stable levels of some 2.5 per cent was forecast for next year. But that slowdown was attributable to a very limited extent to the crisis in South-East Asia.

Mr. Herman added that strong investment, as well as strong consumption in the United States were expected to continue. Some people had expressed concern that inflation was just around the corner, thereby requiring higher interest rates to stop the economy from growing at more than a sustainable rate. But perhaps policy-makers should wait before raising interest rates in anticipation of inflation they did not see, since it was uncertain whether the old inflationary mechanisms were working like they used to. The rate of inflation for the developed countries as a whole averaged 2 per cent in 1997. The last time that occurred was in 1961. So caution was urged in not tamping down demand too much in the next year.

Asked for clarification concerning the growth forecast for the United States, Mr. Herman said that the United Nations estimate for United States growth in 1997 was 3.7 per cent. For 1998, it was 2.5 per cent. The United

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States was growing much more strongly than forecast last summer. Basically, the world economy was more or less as expected, although the situation in South-East Asia had not been anticipated. World growth, forecast at 3 per cent, was measuring 3.2 per cent. The developed countries, which were expected to grow at a rate of 2.5 per cent, had grown an estimated 2.6 per cent in 1997. The United States' economy grew more than expected, while the Japanese grew less, owing to the banking and confidence crisis in Japan, which had held back borrowing and growth. The transition economies of eastern and central Europe, including those in the Baltic region and the former Soviet Union, also appeared to grow, in keeping with the first-time forecast of growth. In particular, it had been predicted that the Russian Federation would show output growth for the first time. In the developing countries, the United Nations forecast was close to the mark. The major missed point was the extent of the crisis in South-East Asia.

Another correspondent asked about the lack of analysis in the report about Latin American and African economies. Mr. Kinniburgh said that the current financial crisis in South-East Asia had dominated the study. Mr. Herman said that for the first time since the Mexican non-payment in 1982 -- which had began the foreign debt crisis -- there was concern about the impact on the financial systems of the developed countries of events in the developing countries.

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