PRESS BRIEFING BY GLOBAL ECONOMIC ANALYSTS

Press Briefing

PRESS BRIEFING BY GLOBAL ECONOMIC ANALYSTS

There were very encouraging signs of a strong recovery of world trade and a fairly strong continued growth pattern for most areas in the world, Professor Peter Pauly of the University of Toronto told a press briefing at United Nations Headquarters this morning.

Professor Pauly was accompanied by Professor Lawrence Klein and Jozef von Brabant of the United Nations Department of Economic and Social Affairs. He and Mr. von Brabant were the coordinators of Project Link, a large international research consortium which integrates independently developed national econometric models into one global economic model. Project Link was started some 31 years ago by Professor Klein, described by Mr. von Brabant as " the intellectual inspiration" of the project.

The two professors were in New York to participate in a meeting of the project, currently in session. Two such meetings of national and international economic experts are undertaken each year,

Fairly strong growth was expected for most industrial countries, as well as for emerging markets that had suffered, in 1998 and 1999, from the after- effects of the Asian financial crisis, Professor Pauly continued. The project's basic analysis had shown that despite the current financial turmoil, the fundamentals of the global economy were fairly strong. This was an assessment confirmed by analysis presented to the meeting by other international organizations, and borne out in the representations of experts from 60 countries which contribute expertise to the project's global outlook. The fundamentals were encouraging and the outlook for the next two years was quite strong.

Professor Klein explained that Project Link met twice yearly. At its meeting in the autumn of 1997, just after the outbreak of the world financial crisis, the Project's forecast, along with those of most economists and forecasters in major multinational organizations, was behind the curve. The world economy had experienced a more serious setback than had been projected. Project Link had expected a slowing down, but not a series of crises.

The project had subsequently followed the situation very closely and, when it met last autumn in Athens, its forecasts were ahead of the curve in predicting a recovery in the world economy. Ever since, he said, there had been month-by-month signs of improvement. Of course he could not say this improvement would last forever, and there were indeed some uncertainties in the world economy, but things looked much better and much more under control at present.

There were two very major issues in the world economy at present that must be examined, he explained. The first was the difference between the turbulence in some financial markets and the very steady improvement in what was called the real economy. The second was the interesting questions raised by the existence of both new and old economies –- strikingly visible in the United States and now spreading to other parts of the world.

Economic Analysts Briefing - 2 - 18 April 2000

After examining the statistics last autumn, Project Link had concluded that the very serious inflation of the recent past had been brought under control. World production was reviving. Unemployment, even in areas of the world where it had been very stubborn, was coming down a bit, and in the United States had come down a lot. World trade had been a victim of the financial crisis. Usually world trade was very robust, and grew faster than world production, but in the period after the crisis, it slumped significantly. Now he predicted expansion in both world trade and production, and improved tendencies in labour markets, all achieved without very serious inflation. Inflation was still a problem in pockets of the world, but, by and large, it was not the key issue today.

Professor Pauly told correspondents that Project Link's basic analysis had been presented yesterday. Its optimistic assessment of global economic fundamentals was confirmed by analysis from other international organizations, and by representations from the 60 countries that contributed expertise to the project's global outlook.

Looking at the different regions, Mr. von Brabant said the forecast was for a return to positive growth of around 4 or 5 per cent in Latin America, up from 0.1 per cent growth in 1999. In Africa a growth of roughly 2.5 per cent to 4.5 or 5 per cent was expected, which meant there would be about 1.5 per cent per capita income growth in Africa for each of the two years of the forecast (2000 and 2001). The model showed that South and East Asia would, as a region, perform a little stronger in 2000-2001 than it had in 1999, but that growth within the region would be varied. Countries that had recovered rapidly from the financial crisis would see slightly slower growth rates, whereas those where the recovery had lagged would pick up speed. The only group for which the forecast did not look bright were the economies in transition, particularly those of the Commonwealth of Independent States, although positive growth was expected to continue in Russia.

Asked about the outlook for Japan, Professor Klein said that Japan had been in recession on and off since 1989, when it suffered from the bursting of its speculative equities and real estate bubbles. It had appeared, in early 1999, that recovery was under way; but in the last half of the year there were two successive quarters of negative movement. Yesterday, reports were supporting the forecast that Japan would return to positive growth –- not enormously fast growth, but at least positive. The presentations on Japan in the project's meeting this morning were mildly optimistic, and suggested that recovery had simply been interrupted.

The negative growth of the latter half of 1999 was not a return to recession, he said, and Japan would undoubtedly pick up. Deflation would bottom out in 2000, according to the forecast. At present the Japanese economy was being propelled into recovery by two factors: increased consumer spending and increased private investment. He personally believed that Japan was beginning to take a deeper interest in the new economy and in new high-tech investment, and that these things were pushing Japanese investment.

Economic Analysts Briefing - 3 - 18 April 2000

Another source of movement identified in the morning meeting, he continued, was that profits were beginning to improve for Japanese companies. Japan was reforming its economy, for example through setting aside or modifying the concept of lifetime employment. A speaker this morning had suggested that Japan would produce more goods and start to recover, but that unemployment might still increase. The labour market was becoming more flexible and it appeared Japan might be following some United States' practices, such as large-scale downsizing in employment-heavy companies, and might therefore become more streamlined and more efficient, with better growth. All in all the Japanese economy looked promising, Professor Klein concluded.

Professor Pauly said that there had recently been instances of false starts for the Japanese economy –- strong growth at the start of the year fizzling out as the year progressed. He believed it would be different this time around, and that Japan was beginning to turn the corner. However, even though the assessments were positive, a growth rate of only about 0.9 per cent was expected this year, rising to about 2 per cent the following year. That was significantly below the industrial country average, so there was still some slack that the Japanese economy had to work off. That said, he thought the economy was firming up, and prospects for the next two years were slightly better than had been the case for the last two.

Asked whether the United States economy could continue its strong growth, Professor Klein said it could probably not continue to be as high as it was in the fourth quarter of 1999. Very soon, the first quarter report for 2000 would be available. That was history, although very recent history, and would probably show that there had been another strong quarter. In the forecast he planned to present to the current Project Link meeting, he was predicting that growth would slow down in the second quarter. The United States would keep growing, but not at the very high rates that had been seen in the recent past.

He also warned that there had been many revisions to the methodology and concepts used for the accumulation of statistics on the United States economy. What was considered rapid now was very different from what was considered rapid two years ago. He thought the revised data-collection methods, which he viewed with a certain suspicion, had added a full point to the country's announced growth rate, and a single additional percentage point meant a lot when you examined the statistics for a country like the United States.

Asked why he was predicting slower growth, Professor Klein explained that the United States Federal Reserve had increased interest rates five times, and the end of that string of increases had clearly not yet been reached. In addition, there had been great concern in 1999 about the Y2K computer problem. While the problems themselves had not occurred, expectation of them had resulted in very heavy consumption towards the end of last year, by people and by companies. Consumption by people would turn up in the statistics as consumer spending, and that by companies would appear as increased inventory. This additional consumption had an extremely powerful influence on the figures for the fourth quarter of 1999. In the first quarter of 2000, there had not been much relaxation, but if you examined the statistics very carefully, you could see that automobile sales in March, while still high, were slightly below those

Economic Analysts Briefing - 4 - 18 April 2000

for January and February. This type of expenditure was very closely related to the build-up that occurred at the end of last year, and also to the capital gains from the stock market, which would probably cool off now.

Professor Pauly said the revaluation of the stock market, even if it remained contained very narrowly to the high-tech sectors, would probably have an effect on consumer sentiment and on private sector assessments of prospects for the next two years. So there would be downward pressure on private spending, not as a consequence of changes in wealth, but as a result of the effect of the revaluation on consumer sentiment and consumer confidence.

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