In fact Continental Europe is looking one of the least promising regions for business expansion and investment over the next two years, although there should be some pick-up in 1997. A combination of factors has combined to recreate fears of Euro-sclerosis, in which Germany and the countries clustered around it are left behind in the global recovery stakes. The upward march of the German mark in the 1990s, particularly since the departure of Britain, Italy and Spain from the exchange rate mechanism in September 1992, has left German exports uncompetitive in international markets and ceded an advantage to those countries which have let their currencies depreciate.
This has been accelerated by rigidities in the labour markets, including all-powerful trade unions, which have pushed the private sector into what the IMF describes as 'unwarrantedly high wage settlements' which in turn have rendered Germany less competitive. On top of all this the country has been rocked by a sharp drop in consumer confidence which has held back private consumption and business investment.
The interconnections between the German and French economies are now so strong, as a result of the ERM and common monetary policies, that President Chirac's France will also turn in sluggish growth this year at 1.3 per cent (1.4 points on the IMF's October forecast).
The structural weakness in the largest European economies might, under different circumstances, have been enough to push the world into recession. Fortunately, however, 1996 looks like becoming a year of revival for Japan after two desperate years when an overvalued yen, serious problems in its banking sector (still not fully resolved), and the Kobe earthquake disturbed economic prospects. With interest rates forced down to the lowest levels since the second world war, the yen more than 20 per cent down against the dollar, and the re-engineering of major industries like cars to feed the less luxurious demands of the current decade, expansion is now taking place.
The IMF's Spring forecast envisages a sharp recovery for Japan to 2.7 per cent growth in 1996, after less than 1 per cent last year. Even though interest rates may have to rise later this year or in 1997 to dampen monetary expansion, growth next year could well be above 3 per cent, making Japan the fastest expanding country among the G7 industrial nations.
As always the key to a sustainable recovery will be the behaviour of the US economy. The Clinton administration, which is focused closely on November's Presidential elections, is anxious for a sixth year of recovery so that the 'feel good' factor can propel President Clinton back to the White House. There should not be too much difficulty in sustaining an upturn, which has already been strong enough to restore the post-deregulation US airline industry to a good measure of financial stability.
After the slowdown in the latter part of last year the IMF projects that the US economy will expand at a 1.8 per cent rate in 1996, which is close to full capacity. It believes that the buoyancy of the US economy will be sustained by last year's easing of monetary conditions by the Federal Reserve, the US central bank. However, it is the IMF view that if the current recovery - which is becoming one of the longest in modern history - is to be sustained the next administration will have to continue cutting the budget deficit. This will enable long-term interest rates to be reduced and free up funds currently being swallowed by the public sector for private sector savings and investment.
Buoyant conditions in the developing world have helped industrialised countries sustain their upturn. The emerging market economies of Asia are the global stars with growth projected as high as 8.2 per cent in 1996, just a shade down on last year despite tighter economic conditions in China. Even though output in mainland China slowed to around 10 per cent last year the IMF fears that continued monetary growth could pose some risks. Elsewhere in the region India's growth is expected to slacken a little this year and recovery should become more firmly established in the Philippines.
Latin America should bounce back after the interruption of the 1994/95 Mexican crisis which saw output there plunge by some 7 per cent, dragging down the region's performance to a barely positive rate of growth. Expansion of 3.1 per cent is now expected this year, accelerating to close to 5 per cent in 1997. Similarly, the long decline in Russia's output is expected to be over in 1996 with the forecast for 1.9 per cent growth in the region, after a 4.3 per cent decline in 1996.
With the notable exception of Continental Europe the 1996 outlook looks relatively benign with the main danger points a further slowing in Germany, overheating in the US and a clattering halt to China's runaway economy. However, the forecasting odds are for a healthy 1996 with global growth improving even further to 4.8 per cent in 1997.
Alex Brummer
Source: Airline Business
