'PROJECT LINK' PROJECTS SLOWDOWN IN GLOBAL GROWTH DURING 1998

Press Release
ECO/2

'PROJECT LINK' PROJECTS SLOWDOWN IN GLOBAL GROWTH DURING 1998

NEW YORK, 13 March (Department of Economic and Social Affairs) -- The continuing growth of the world's gross domestic product (GDP) and trade in 1998 is expected to be 2.7 and 7 per cent, respectively, compared to 3.1 and 9 per cent in 1997, according to Project LINK, a co-operative, non-governmental, international research activity, supported by the Department of Economic and Social Affairs. The major cause of the expected slowdown in global growth is the contraction expected for a number of Asian countries, in contrast with their past high rates of growth. A stagnation is foreseen in Japan, Brazil and Ukraine, and LINK forecasts a lower growth in the United States for 1998.

Project LINK integrates independently developed national econometric models into a global econometric model. It was initiated 30 years ago, under the auspices of the Social Science Research Council of the United States, by Nobel Laureate Professors Lawrence Klein and Bert Hickman of Stanford University. The project encompasses 78 country models, including 45 models of individual developing countries and regions.

LINK organizes two meetings a year at which more than 100 participants discuss emerging world economic issues. They explore short-term forecasts prepared by using the LINK model, and debate economic policy assumptions and emerging issues, such as the impact of the Asian financial crisis. The spring meeting of LINK will take place from 16 to 19 March at Headquarters.

According to the LINK team, many countries need stronger policies to stimulate domestic demand, in order to ensure a return to 3 per cent world economic growth in 1999 and beyond. The LINK outlook indicates that the main opportunities for reviving the exports of developing Asia are in Japan and the United States, their major export markets. Also of concern to LINK forecasters is that global policy coordination be sustained and that national reform efforts not be allowed to falter.

After six years of expansion, almost all macroeconomic indicators for the United States economy are at their best levels for the past few decades. Real GDP grew at 3.8 per cent last year, far higher than the officially estimated potential growth rate of 2.5 per cent, while inflation remained subdued, unemployment dropped further still and the government deficit continued to shrink. Despite some uncertainties, the LINK forecast for the

United States economy for the next two years remains moderately optimistic, with GDP expected to grow at 2.7 per cent this year, decelerating to about 2.3 per cent in 1999.

LINK forecasters expect stagnation in Japan this year and only a weak recovery in 1999, based on the Government's recent proposals for only a moderate fiscal stimulus. The impact of this stagnation on Japan's Asian trading partners, as well as their ability to resume their former growth paths, are worrisome.

The outlook for Europe is one of steady and more balanced economic growth in 1998 and 1999. Some pick up in inflation will emerge, but well within targeted ranges. Unemployment is expected to decline, though not significantly. This two-year period will also see the conclusion of the Economic and Monetary Union process, which will have a bearing on the outlook.

The year 1997 saw a European rebound from the slowdown in 1996, with growth characterized by robust export performance, stemming from a strong depreciation of most European currencies against the dollar and declining unit labour costs in some countries. However, domestic demand was weak, particularly consumption, partially due to the major fiscal consolidations undertaken to meet the Maastricht criteria. The high levels of unemployment have negatively affected consumer confidence. Investment expenditure has also been weak. GDP growth in 1998 is expected to accelerate, with exports moderating and domestic demand picking up the slack. With the unemployment situation beginning to turn around, consumption expenditure should pick up and investment should also accelerate, given the low interest rates and improved business confidence. Unemployment is expected to enter a period of sustained but modest improvement. Some resumption of inflation is anticipated, and the forecast assumes some tightening of interest rates in the second and third quarters of this year.

After several years of decline, 1997 marked a turning point for the economies in transition, with a regional GDP growth rate close to 2 per cent. LINK models suggest that the overall growth in those countries this year will accelerate further, to almost 3 per cent, though performance will differ notably from country to country. After meagre growth in 1997, the LINK team forecasts a modest 1.4 per cent GDP increase for the Russian Federation this year. In order for it to be on a growth path, a great deal of structural and institutional reform is called for. In the medium term, the negative impact of low past investment has to be contended with. In Ukraine, economic growth is not expected to take off.

For 1998, LINK forecasts see a contraction in three of five economies in developing Asia, hardest hit by the financial crisis that erupted last July, namely, in Indonesia, the Republic of Korea and Thailand. Malaysia and the Philippines are expected to grow at only 2 to 3 per cent. Domestic demand in

- 3 - Press Release ECO/2 16 March 1998

these three countries will be extremely weak this year and next, as a result of stringent adjustment measures. Private investment is expected to decline by 15 to 25 per cent this year, which may have negative implications for these countries' growth potential in the longer run. Inflation is rising rapidly, between 10 to 20 per cent, and unemployment is expected to increase by 1 million to 2 million this year in each of these economies. The trade balance is improving dramatically, but mainly due to import contraction. Nevertheless, the revealed fragility of the financial sector highlights the size and depth of the systemic issues that still need to be addressed, with the outcomes depending on the policies. Given spill-over effects, some reductions in the growth rates of the majority of countries in the region are to be expected, although two major economies in the region, India and Pakistan, have been fairly insulated so far from the crisis and are expected to register growth rates of 6 and 4 per cent, respectively.

While China has recently shown some softening of effective demand, LINK forecasters remain optimistic about the outlook for this economy, anticipating 8 per cent growth both this year and next. This is despite the fact that, as a result of the Asian crisis, China's export growth is expected to slow sharply. The LINK team assumes that China will not devalue and that there will be a fairly smooth continuation of China's long-run restructuring reforms, especially of State-owned enterprises and in the financial sector. Nevertheless, difficulties are expected, such as the increasing number of lay-offs from the State-owned enterprises.

Turning to Latin America, LINK forecasters see an economic recovery, even an economic expansion, in the region as a whole, in the wake of the Mexican financial crisis of late 1994. There is, however, one exception, namely, Brazil, which is expected to slip to one third of 1 per cent growth rate this year. All in all, a generally favourable environment, as the LINK team sees it, has helped to limit the spread of Asia's financial woes to Latin America. Included here is the fact that many of the Latin American economies have undergone persistent economic restructuring in the 1990s and have developed healthier banking systems in the aftermath of the Mexican crisis. Then, too, the region has enjoyed buoyant markets for its exports and has benefited from trade liberalization within the region, especially within MERCOSUR. Nevertheless, LINK forecasters still see some clouds hanging over the region, with one notable problem in the major economies being the fact that deficits in government budgets and the current account, which had been curbed in the post-Mexico crisis adjustments, have begun to deteriorate again. Also, unemployment remains high in some economies, causing worsening income distribution and social stability problems.

With regard to Africa and the Middle East, LINK forecasters place a great deal of emphasis on current uncertainties in the international environment, which may have a large fall-out on primary commodity exporters. They maintain that two problems, in particular, stand out. First, weak

- 4 - Press Release ECO/2 16 March 1998

commodity prices, including depressed oil prices due to reduced demand and possible increases in exports from Iraq, will be a problem for many countries on the region. Second, weaker import demand in Asia for African raw materials, in the wake of the Asian financial crisis, is expected to have significant fall-out effects, negatively impacting on some African countries. On the other hand, the effects of the El Niño weather pattern will probably be less than forecasters had originally feared, particularly in southern Africa, where a severe drought had been expected.

* *** *