With only a few exceptions, the signs of a slowdown first seen in the second quarter of this year, when the US economy came perilously close to moving into recession, have become a reality for the larger industrialised economies. Together with the shadow cast across emerging market countries by the Mexican crisis at the start of the year, this sluggishness among the G7 economies has left the world economy drifting.
In the industrialised countries, most notably those of western Europe, growth levels have proved insufficient to deal with the most pressing problem - the stubborn level of unemployment. In the developing countries many of the factors that have fuelled the brisk growth of recent years are proving more ephemeral than had been expected.
The Latin American recovery was largely based on a consumer-driven import boom somewhat punctured by the new reality which followed the Mexican bail-out. And in east and southeast Asia, where growth appeared to be strongly entrenched, much of the optimism has been inflated by a relocation of production driven by direct foreign investment rather than real increases in productive capacity. Moreover, the recovery experienced in several primary producing countries, such as those of Africa, was largely the result of sizeable and widespread increases in commodity prices. As the industrialised countries' economies have cooled so has the speculative activity which led to higher commodity prices.
Much of the despondency which has enveloped the developing countries stems from the below par performance among the big three industrial economies: the US, Japan and Germany. Both the private sector projections and new official forecasts which form the background to the Washington talks show a distinct pause in performance.
There is some hope that the decision to ease interest rates in each of these countries could result in a rebound in 1996, prolonging the upswing in the business cycle and the prospects for the air transport sector where profits performance is closely tied to growth. However, in the US private sector forecasters such as ABN-Amro believe that from the current quarter of this year growth rates will ease to between 2 and 2.5 per cent on an annualised basis, which means that overall growth for the full year will be 3 per cent, down from 4 per cent in 1994. Despite some easing of monetary policy by the Federal Reserve - the US central bank - a further decline in growth to an annual level of around 2.3 per cent is being seen in 1995.
Even more problematical has been the performance of Japan. IMF hopes, for instance, of 1.8 per cent growth this year are now seen as impossible. The combination of a massively overvalued Japanese yen, price deflation and policy indecision - as well as problems in the banking and finance sector - meant that there was virtually no growth in the first half of the year. An easing in the official discount rate (ODR) to just 1 per cent has finally eased the upward pressure on the Japanese yen. Recovery will be partly constrained by the sluggishness in its biggest market, the United States.
The boldest moves to restore growth in 1996 have been taken in Germany. Official interest rates were cut in late August 1995 by a half point downwards towards 4 per cent. The easing was partly allowed by an improvement in inflation, currently running at below 2 per cent, but was mainly the result of increasing fears about the economy slowing to a standstill. Official forecasts of 3 per cent growth in 1995 are seen by forecasters as unachievable. Activity across the economy has been suppressed by a combination of factors including an effective 7.5 per cent increase in personal taxation; the tightening of monetary conditions in the early part of the year; and, most importantly, the surge in the value of the Deutsche mark on the foreign exchanges.
Manufacturing industry in Germany, which saw sluggish growth in the first half of the year, has not been helped by industrial action. However, the aggressive reduction in German interest rates and hints of a turnaround in consumer spending suggest that there is a reasonable chance of a bounce back next year when private sector forecasters are projecting a 3 per cent rise in real GDP. The only other European economy showing any signs of vibrancy is Italy, where export-led growth is soaring courtesy of the weakness of the lira and supported by strong private consumption. Its output is predicted to rise to 3.2 per cent this year, making Italy the fastest growing G7 economy.
The Italian resurgence will not, however, be of much comfort to global policymakers as they survey the prospects for the global economy. Official forecasters such as Unctad point to a sharp decline in Latin American growth from 3.7 per cent in 1994 to 2 per cent this year as a result of the reversal of capital flows which followed the collapse of the Mexican peso in December 1994. In Africa the economic recovery remains tenuous despite several years of economic reforms and the share of world markets and trade will continue to shrink this year. The developing countries of Asia remain the most dynamic with growth expected to accelerate from 5.3 per cent in 1994 to 6 per cent, as Japan's neighbours benefit from the strength of the yen and the switch of production offshore.
The only other place that policymakers and bankers can look for a degree of comfort is the former Soviet Union and central Europe. Here, the long period of decline in output may be drawing to a close as the Russian Federation starts to enjoy the benefits of trade surpluses. Growth across the region will decline by a further 4.2 per cent this year compared to the 10.1 per cent decline in 1994. This trend, together with improved conditions in Germany and Japan encouraged by lower interest rates, offers the best hope of preventing global stagnation in 1996.
The only other place that policymakers and bankers can look for a degree of comfort is the former Soviet Union and central Europe. Here, the long period of decline in output may be drawing to a close as the Russian Federation starts to enjoy the benefits of trade surpluses. Growth across the region will decline by a further 4.2 per cent this year compared to the 10.1 per cent decline in 1994. This trend, together with improved conditions in Germany and Japan encouraged by lower interest rates, offers the best hope of preventing global stagnation in 1996.
Source: Airline Business
