Current international economic conditions
1. International oil price
Source: IMF International Financial Statistics
The Organisation of Oil Exporting Countries (OPEC) met on 4-5 June2001 in Vienna to review the state of the oil market. The cartel observed that the prices of crude oil are relatively stable, with the year-to-date average of the OPEC basket price[1] of $24,8 per barrel having been within the agreed range of $22-$28 per barrel. OPEC again confirmed that the cartel is aiming to stabilise the market at an OPEC basket price of around $25 per barrel. Furthermore, the conference noted that stocks of both crude oil and products are at satisfactory levels. The markets were, however, shocked by a sudden announcement by Iraq to halt its oil exports from 4 June 2001 as a protest against United Nations Security Council’s decision to extend the oil-for-food programme for one month instead of the usual six-month period. Saudi Arabia – the largest oil producer – and other OPEC producers, however, said that they were prepared to make up any shortfall on the world market. OPEC decided to leave production quotas unchanged, but agreed to review the impact of Iraq’s oil export stoppage at an extraordinary meeting in July 2001.
2. Global economic outlook: Real gross domestic product
IMF / World Bank / OECDForecast of GDP growth in 2001
World / 3.2 / 2.2 / -
USA / 1.5 / 1.2 / 1.7
Japan / 0.6 / 0.6 / 1.0
Euro Area / 2.4 / 2.5 / 2.6
OECD / - / 1.6 / 2.0
Developing Countries / 5.0 / 4.2 / -
Countries in Transition / 4.0 / 4.1 / -
Forecast of GDP growth in 2002
World / 3.9 / 3.3 / -
USA / 2.5 / 3.3 / 3.1
Japan / 1.5 / 1.8 / 1.1
Euro Area / 2.8 / 3.1 / 2.7
OECD / - / 2.8 / 2.8
Developing Countries / 5.6 / 4.9 / -
Countries in Transition / 4.2 / 3.8 / -
Sources: IMF World Economic Outlook (May 2001), World Bank Global Development Finance (April 2001) & OECD Economic Outlook (May 2001)
There seems to be little consensus among the three main multilateral economic agencies about the prospects for global economic growth until the year 2002. Surprisingly, the World Bank and the IMF display significant differences in their growth forecasts despite the close co-operation that exists between the two institutions on matters concerning the world economy. According to the IMF, global GDP is expected to grow by 3,2 per cent in 2001, well above the World Bank’s forecast of 2,2 per cent during the same period. The 0,6 per cent growth forecast for Japan in 2001 is the only area where the two organisations seem to agree. Nevertheless, this growth forecast is still 0,4 percentage points below the OECD’s forecast of 1,0 per cent for Japan in 2001. Both the World Bank and the OECD expect that the latter’s economic growth will increase by 2,8 per cent in 2002. The highest rate of economic growth is predicted by the IMF for developing countries at 5,0 per cent and 5,6 per cent in the years 2001 and 2002, respectively. Countries in transition are expected to grow at around 4 per cent for the next two years.
3. World economic outlook: Consumer prices
Annual percentage change in consumer prices
Actual / Projections1999 / 2000 / 2001 / 2002
World / 5.5 / 4.7 / 4.2 / 3.4
Advanced economies / 1.4 / 2.3 / 2.1 / 1.8
USA / 2.2 / 3.4 / 2.6 / 2.2
Japan / -0.3 / -0.6 / -0.7 / -
Euro area / 1.2 / 2.4 / 2.3 / 1.7
Developing countries / 6.7 / 6.1 / 5.7 / 4.8
Africa / 11.5 / 13.5 / 9.6 / 5.7
Asia / 2.1 / 1.8 / 2.8 / 3.2
Western Hemisphere / 8.8 / 8.1 / 6.3 / 4.8
Countries in transition / 43.9 / 20.1 / 15.3 / 10.0
Source: IMF World Economic Outlook – May 2001
In an environment of slowing global growth, commodity prices are expected to weaken. Oil prices have retreated from their late 2000 highs, and the IMF expects the risks to be on the downside. As oil prices stabilise, headline inflation in most industrial countries has begun to stabilise. Underlying inflation is also expected to remain generally subdued as a result of moderate wage increases. Inflation, however, remains a concern in some faster growing European countries and in a number of developing and transition countries.
4. Key central bank interest rates
Countries
/1 Jan 2001
/15 June 2001
/Last Change
USA
/ 6.50 / 4.00 / 15 May 2001 (-0.50)Japan / 0.25 / 0.00 / 19 March 2001 (-0.15)
Euro Area
/ 4.75 / 4.50 / 10 May 2001 (-0.25)United Kingdom / 6.00 / 5.25 / 10 May 2001 (-0.25)
Canada
/ 5.75 / 4.50 / 29 May 2001 (-0.25)Denmark
/ 5.40 / 5.00 / 14 May 2001 (-0.30)Sweden / 4.00 / 4.00 / 7 December 2000 (+0.25)
Switzerland / 3.50 / 3.25 / 22 March 2001 (-0.25)
Australia / 6.25 / 5.00 / 4 April 2001 (-0.50)
New Zealand
/ 6.50 / 5.75 / 16 May 2001 (-0.25)Israel / 8.00 / 7.00 / 29 May 2001 (-0.20)
Indonesia
/ 14.42 / 16.48 / 13 June 2001 (+0.15)Malaysia
/ 2.84 / 2.85 / 14 June 2001 (-0.01)South Korea / 5.25 / 5.00 / 8 February 2001 (-0.25)
Thailand
/ 1.50 / 2.50 / 8 June 2001 (+1.00)Taiwan
/ 4.63 / 3.75 / 17 May 2001 (-0.25)Brazil
/ 15.75 / 16.75 / 23 May 2001 (+0.50)Chile / 5.00 / 3.50 / 12 June 2001 (-0.25)
Mexico
/ 18.46 / 11.33 / 18 May 2001 (-50 million)*Czech Republic / 5.25 / 5.00 / 22 February 2001 (-0.25)
Hungary / 11.75 / 11.25 / 5 February 2001 (-0.25)
Poland / 19.00 / 17.00 / 29 March 2001 (-1.00)
Russia / 6.00 / 7.00 / 15 January 2001 (+0.50)
* The Mexican central bank adjusts the money market shortage (or “corto”) to effect the market rates
Source: National central banks
Global easing continued as the European Central Bank (ECB) surprised markets by cutting its official interest rate by 25 basis points from 4,75 per cent to 4,50 per cent on 10May2001. Likewise, the United States continued with its stimulatory monetary policy by announcing yet another 50 basis points reduction in the federal funds rate from 4,5 per cent to 4,0 per cent on 15May2001. This brings the total reduction in the federal funds rate to 250 basis points since the beginning of the year. Although a large number of advanced as well as emerging-market economies followed the direction of the ECB and the Federal Reserve with their own interest rate cuts, a significant number of economies decided to maintain their current monetary policy stance. Brazil and Thailand, however, raised official rates since May. The interest rate hike in Thailand followed a public dispute between the prime minister and central bank governor over monetary policy. The prime minister insisted on higher interest rates to encourage consumption and strengthen the currency in order to prevent capital outflows. The central bank governor refused and was fired. The new governor announced on 8 June 2001 that the 14-day repo rate would be increased by one percentage point to 2,5 per cent.
5. USA: Real gross domestic product
Source: Federal Reserve Bank of St. Louis
Real gross domestic product in the United States is now estimated to have increased by 1,3 per cent in the first quarter of 2001 after increasing by 1,0 per cent in the fourth quarter of 2000. The revised growth rate for the first quarter was 0,7 percentage points less than the previous estimate of 2,0 per cent. The revision reflected lower inventories and consumer spending combined with higher imports than initially reported. Consumer spending still remains the most important pillar of economic growth. A large swing in inventories from accumulation to decumulation, however, lowered the first quarter growth by nearly 3 percentage points. The deteriorating labour and equity markets, however, remain critical factors for personal consumption. The latest available monthly economic data indicate that real GDP growth has slowed down in the second quarter of 2001. There is, however, a good chance that the US economy will return to a sustainable growth path in the second half of the year. The recently approved tax cut package by the US Congress will boost after-tax income by the third quarter of this year. In conjunction with the Federal Reserve’s dramatic easing of monetary policy, these measures could stimulate the economy and bring about a recovery by the fourth quarter of 2001.
6. USA: Industrial production
Source: Federal Reserve Bank of St. Louis
Industrial production declined by 2,8 per cent (year-on-year) in May 2001, well below expectations. Real output in the manufacturing sector fell by 0,7 per cent (month-on-month). After eight consecutive months of contraction, manufacturing output is now 3,3 per cent below its level in May 2000. The rate of capacity utilisation for total industry also fell further to 77,4 per cent, the lowest rate in more than a decade. The declining industrial production suggests that GDP growth may be negative in the second quarter.
7. USA: Unemployment rate
Source: Federal Reserve Bank of St. Louis
The employment situation remained weak in May, although the weakness was not as pronounced or widespread as in the previous month. The total non-farm payroll employment dropped by 19000 following the steep loss of 182000 (revised) in April 2001. Manufacturing in particular fared poorly in May with a loss of 124000 jobs, bringing factory job losses thus far this year to 470000. The unemployment rate, however, fell unexpectedly to 4,4 per cent in May due to a decline in the labour force.
8. USA: Productivity and cost
Error! Not a valid link. Source: United States Department of Labor
Productivity growth - as measured by output per hour of all persons - for the first quarter of 2001 was lower than initially reported. Revised data indicate that labour productivity declined by 1,2 per cent (seasonally adjusted and annualised) in the non-farm business sector during the first quarter. This was the first decline in labour productivity since 1995. Hourly compensation, however, increased in the same quarter at 5,1 per cent. Lower labour productivity growth accompanied by an increase in hourly compensation resulted in higher labour costs per unit of output. Unit labour costs rose by 6,3 per cent in the first quarter, the fastest pace in a decade. This also represents a significant acceleration in unit labour costs over recent quarters.
9. USA: Consumer prices
Source: Federal Reserve Bank of St. Louis
The United States seasonally adjusted all-goods consumer price index (CPI) increased by0,3 per cent in April2001, following a marginal increase of 0,1 per cent in the previous month. This sharp increase was assisted by a strong rebound of 5 per cent in gasoline prices. On a year-on-year basis the increase in the overall CPI accelerated from 2,9 per cent in March to 3,3 per cent in April 2001. The monthly core CPI, which excludes the volatile food and energy prices, increased only 0,2 per cent in April 2001, allowing the year-on-year core inflation to decelerate marginally to 2,6 per cent. As widely anticipated, the Federal Open Market Committee announced on 15 May 2001 its decision to cut its target for the federal funds rate by a further 50 basis points to 4,0 per cent. The latest cut is the fifth by the Federal Reserve this year (250 basis points reduction since the beginning of theyear).
10. USA: Current account
Source: US Department of Commerce, Bureau of Economic Analysis
The United States current account deficit widened in March2001 after improving quite sharply in February. March imports jumped 2,9 per cent (not annualised), but remained 4,5 per cent below their recent peak in September 2000. Exports, however, declined by 1,0 per cent in March and have fallen by 3,7 per cent since its high in August 2000. The current account deficit is likely to remain at a relatively high level in the near term. Slower growth in the US economy will limit increases in imports, but slower growth in many foreign economies should also limit export growth.
11. Japan: Real gross domestic product
Source: Economic Planning Agency of Japan
Japan’s real GDP contracted more than expected by 0,8 per cent (seasonally adjusted and annualised) during the first quarter of 2001, possibly precipitating a fourth recession in the past 10 years. Dominant in this decline was both poor capital expenditure and domestic private consumption as firms cut back on production amid rising inventories and consumer sentiment remained weak. The continued weakness in the external sector of the economy and the fact that no budgetary expansion of fiscal policy is expected does not bode well for economic growth in the second quarter either. In terms of monetary policy, the Bank of Japan seems to have done enough (albeit increased political pressure to do more) and is now saving its aces in case the situation worsened.