The international economic outlook in 1993

After three years of decline, the world economy reached the bottom of the most recent downturn during 1991, when there was virtually no economic growth, according to estimates by the International Monetary Fund. Since then a recovery has begun, but it has been slow and uneven. World output increased between 1 percent and 1.5 percent in 1992, according to recent estimates. Sluggish growth in the world's three largest economies--the United States, Japan, and Germany--is a major factor in the slow world recovery.

World growth is expected to pick up in 1993 to around 2.5 percent, but well below the last peak of 4.3 percent in 1988. Economic prospects for 1993 looked much better in mid-1992, but events since then have resulted in several downward revisions in the forecasts for many industrial countries. Many political and economic uncertainties, including the collapse of the European exchange rate mechanism (ERM) in mid-September 1992, have led to a more cautious outlook for 1993.

Of the major economies, Japan seems best poised to resume somewhat more robust growth. Low interest rates and the announcement of a large fiscal stimulus in mid-August 1992 hold out some promise for renewed growth, but serious problems in the Japanese banking system leave the outlook cloudy. Although the U.S. economy continued its slow growth into 1993, there were new signs of recovery toward the end of 1992.

In Western Europe, high interest rates are retarding growth. The cost of German reunification was seriously underestimated, resulting in large fiscal deficits. The German central bank responded with a tight monetary policy, leading to high interest rates in Germany and throughout the Continent. The high rates, in turn, have put a damper on economic growth in the European Community (EC). Western European growth was little more than 1 percent at best in 1992, and is expected to be about the same in 1993.

In general, the economies of the developing countries, which account for nearly 20 percent of world gross domestic product (GDP), have improved. Their growth rate averaged between 5 percent and 6 percent in 1992, and is expected to be equally high in 1993. Important regional differences exist, however. Southeast Asia, including the southeastern provinces of China, continues to be one of the most dynamic areas of the world. The economic reforms that were instituted in many Latin American countries during the 1980's have resulted in the first positive per capita growth for this region in nearly a decade. Mexico has led the way in pursuing policies of privatization, deregulation, and budget and monetary reforms. Similar policies have resulted in more economic stability throughout the region and new inflows of investment, reversing the capital flight of the 1980's.

In the former centrally planned economies of Eastern Europe and the former Soviet Union, 1992 was another year of economic deterioration. The rate of decline slowed in some Eastern European countries, and a few of them may show positive growth in 1993. The former republics of the Soviet Union remain mired in political and economic turmoil. The transition from central planning to deregulated market-based economies is proving to be slow and difficult, and ethnic strife in many republics leaves little hope for economic recovery anytime soon. A return to positive economic growth in this region may be 1-2 years away.

The World Economy in 1992

The world economic outlook as of late 1992, while positive, is certainly less optimistic than one year ago. Following the success of Operation Desert Storm in January 1991, a rebound in consumer confidence in the United States and other industrial countries in the spring, and the failure of the attempted coup in the Soviet Union in August, the prospects for world political and economic progress then looked good. The first quarter of 1992 seemed to confirm this outlook as healthy rates of growth were recorded in the United States, Germany, Japan, and some of the smaller economies, and the Maastricht treaty on EC monetary union was signed in February. However, economic prospects then began to dim as one country after another reported economic weaknesses.

European unity, once seemingly assured, began to seem less certain in the face of various political and economic issues. The U.S. economic recovery was too weak to spur much domestic employment or income growth and certainly was not strong enough to act as an engine for the world economy. Japan's "bubble economy" deflated. Falling property and company stock values put pressure on Japanese banks and other financial institutions while consumer confidence and spending fell. The failure to complete the Uruguay Round--the General Agreement on Tariffs and Trade (GATT) negotiations--threatened the world trading system. Although the threat of trade wars over the issue of European farm subsidies has subsided, the completion and implementation of the Uruguay Round remain to be accomplished. In short, the world economy faces 1993 with many unresolved problems, and, as a result, the economic recovery is likely to be less robust.

Economic Outlook for Industrial Countries

The industrial economies are expected to grow on average around 2 percent in 1993, only slightly faster than the estimated 1.5 percent in 1992 (Table 1). Among the Group of Seven (G-7) countries, the United States, Canada, Japan, and the United Kingdom are expected to grow more rapidly in 1993 than in 1992. However, the German economy is slowing, while the economies of France and Italy are expected to advance at about the same rate as they did in 1992. Structural adjustments are causing the economic recoveries to be slower than usual in the United States and Japan.

[TABULAR DATA 1 OMITTED]

Western Europe

In Germany, the euphoria following the unification of the country cooled as the immense cost of rebuilding the eastern sector became known. The initial hope that the east could be rebuilt in just a few years vanished. The cost is now estimated at $80 billion to $100 billion annually for as long as 10 years. Industry in the east has collapsed, in part because of a rush to increase wages there to the level of those in the western part of the country. Because of the low productivity of the east's industries, wage increases have made them noncompetitive. In addition, the east's old export markets in Eastern Europe and the former Soviet Union have all but disappeared. Unofficial unemployment in the east is more than 25 percent of the work force. This problem is compounded by as many as 500,000 Eastern European refugees who have streamed into Germany in the past 12 months.

In view of the overall situation, the German government is pushing for a "solidarity pact" of wage freezes and new taxes, with the hope that this fiscal restraint will lead to an easing of monetary policy by the central bank. However, economic pessimism in late 1992 led to several reductions in the forecasts of Germany's economic growth in 1993.

France is currently the only major EC country that currently meets the strict monetary and fiscal requirements of the Maastricht treaty--low levels of inflation, government deficits, and debt. Although inflation and government spending are under control, interest rates and unemployment are high, and growth has been anemic, averaging only around 2 percent per year for the last decade. High interest rates are the result of the government's successful efforts to maintain the franc's value within the ERM, even during the currency chaos of mid-September 1992, when the franc came under tremendous pressure following the devaluations of the Italian lira, the British pound, the Spanish peseta, and the Irish punt. France then lowered its interest rates slightly. However, until German rates fall and more rapid growth returns to the EC, France must be content with the fact that its 2 percent growth expected in 1993 is among the best on the Continent.

Among the major EC countries, Italy is the farthest from meeting the Maastricht criteria. For example, one indicator calls for a country's budget deficit to be no more than 3 percent of GDP. Italy's budget deficits, however, have averaged 10 percent of GDP for the last 20 years. Fragile coalition governments have been unable to bring more discipline to the country's finances. In the summer of 1992, a particularly weak government, plus the Danish rejection of the Maastricht treaty in a popular referendum, caused renewed speculation that the lira would have to be devalued within the ERM. An increase in the Italian discount rate in early September failed to stem the move against the lira, and a 7 percent devaluation/realignment of the lira within the ERM occurred on September 13. Four days later, the lira was withdrawn from the ERM; when it might reenter is still a question.

Despite this poor fiscal record, Italy's economy has been one of the most dynamic in Europe during the last decade. While growth has slowed in the last two years, totaling around 1.5 percent in 1992, it was still above that of the EC as a whole. The outlook for 1993 is that the devalued lira will make the country's exports more competitive, but interest rates and inflation will remain high. Italy's growth will be about the same as in 1992. (The political and economic uncertainty within Italy and the EC makes this forecast subject to a wide margin of error, however.)

In the United Kingdom, the longest recession in the post-World War II period has plagued the country since late 1990. The recession, which reduced GDP by almost 5 percent as of mid-1992, was prolonged by heavy debt levels and falling asset values, the same factors that have slowed growth in the United States and Japan. By some estimates, 10 percent of British homeowners are holding mortgages that are worth more than their real estate. High interest rates and an over-valued currency were two additional problems in the United Kingdom.

In late summer there were some indications that the UK. recession might be coming to an end. Before more solid evidence of a recovery could be marshalled, however, the ERM crises hit in mid-September. The British pound left the ERM and was devalued on September 16, but not before the Bank of England spent an estimated $13 billion in the pound's defense. British economic policy has been in some disarray. The government had to back down from an announcement that most of Britain's remaining coal mines would be closed, and in early November the government encountered strong parliamentary opposition to the Maastricht treaty. On the positive side, interest rates were cut, and the sharp devaluation of the pound has made British exports more competitive, boosting the outlook for 1993 growth to somewhat more than I percent.

The goal of a single European currency is now sidetracked by doubts about the Maastricht treaty itself and, more importantly, by the economic pressures of German reunification that led to the ERM crisis. The tremendous costs of unification put pressures on the German economy that required tighter monetary policy and made a realignment of the ERM inevitable. Several European economies within the ERM were faced with the choice of raising their own interest rates in the face of slow economic growth and rising unemployment, or devaluing their currencies relative to the D-mark. Devaluation won.

The strengthening of the D-mark has helped the competitive position of U.S. exports, but the slowdown of Europe's economic growth has weakened one of our principal export markets. Europe accounts for about 25 percent of US. exports. Following the initial spurt of activity associated with German unification, the United States sharply expanded its exports to Germany and thereby was able to narrow its bilateral merchandise trade deficit. US. merchandise exports to Germany increased by 13.6 percent in 1991, but during the year, the rate of export increase began to slow. During the first nine months of 1992, the value of US. exports to Germany was down 1.5 percent from the comparable period in 1991.

The growth of US. shipments to the EC as a whole also has slowed. In January-September 1992, exports to the EC were at about the same level as in the comparable period of 1991. Since the outlook for Western European growth in 1993 is little better --if at all--than in 1992, the prospects for increased US. exports to this market are not good. This is particularly true since the dollar appreciated against several key European currencies, notably the British pound and the Italian lira, after the ERM alignment.

Asia, Australia, and New Zealand

The economy of Japan expanded at the brisk annual rate of 4.4 percent in the first quarter of 1992, but growth has slowed appreciably since then. Japan is suffering from the same problems of asset depreciation that have plagued sectors of the US. and U.K. economies. However, the adjustment process in Japan may take longer and may involve more serious consequences, if only because the run up in asset prices, especially real estate values and company share prices, was so extreme. The depreciation of asset values has put many Japanese banks in serious jeopardy because both real estate and company equity shares are important bank assets.

To counter the growing pessimism, the Japanese government announced a massive fiscal stimulus package on August 28, 1992, that is expected to add almost 1 percent annually to Japanese growth during 1993-94. The package stabilized the economy temporarily--the Nikkei stock exchange index increased around 20 percent from its summer low--but the economic outlook remains uncertain, and stock prices edged down in the late fall. Consumer confidence and spending are down. Business investment, which was a major source of growth in the last three years, has been cut and is expected to fall again in 1993. Although Japanese net exports have been growing, this is the result of weak consumer demand affecting imports. Export values have grown, due to the appreciation of the yen, but there has been little expansion of export volumes.

In the second quarter of 1992, Japan's growth was at an annual rate of only 1.1 percent. The second half of 1992 was slightly better, but its growth was estimated at only about 2 percent in 1992, the worst performance in many years. For 1993, the outlook calls for growth of around 3 percent, but as in the case of numerous countries in this survey, the many uncertainties mean that the margin of forecasting error is large.

Australia's recovery from its recession began in the spring of 1991, but it has been sluggish. Australia was one of only a handful of the industrialized countries to show better growth in 1992 (estimated at 1.5 percent) compared with 1991 (-1.9 percent). Strong gains in real incomes favorably affected consumption and residential construction during the recovery. New government programs to boost spending on infrastructure, education, and health will speed growth in 1993. Also, a sharp drop in the value of the Australian dollar in the last year is expected to boost exports. Growth is forecast at between 3 percent and 4 percent in 1993. New Zealand recovered from a recession during 1992, and the outlook for 1993 is for growth of around 4 percent.

North America

The Canadian economy was in a recession during 1990-91. Canadian monetary authorities tightened monetary policy in the spring of 1989 in response to excess demand and increasing rates of inflation. The policy was successful as inflationary pressures eased, but the economy has been weak ever since. Monetary policy eased in early 1992, and short-term interest rates fell by nearly three percentage points during the year. Economic growth is estimated at less than 2 percent in 1992, compared with a decline of almost 2 percent in 1991. The outlook is for stronger growth of around 3 percent in 1993.

In the United States, despite six successive quarters of positive economic growth, there has been no general perception that the recession had ended. Because of the sluggishness of the economy during this period, and weak income and job growth, consumer confidence remained low. Households elected to pay down personal debt rather than finance new purchases. Government cutbacks in defense spending also contributed to the slow growth rate. Throughout the past four years, U.S. exports have been an important element in keeping the economy moving forward. In 1992, export growth slowed, primarily because of the world economic slowdown. Although the world economy is expected to advance more rapidly in 1993, uncertainties mean that forecasts of more rapid U.S. export growth in 1993 should be treated with caution. The US. economy increased an estimated 2 percent in 1992, and is expected to grow by as much as 3 percent in 1993.

Economic Outlook for Developing Countries

Asia

Despite economic problems in Japan, Asia was again one of the most rapidly growing regions in the world in 1992. Strong economic growth, which was once largely confined to the four newly industrialized countries (NICs)--Hong Kong, Singapore, Taiwan, and South Korea--has spread to other countries in the region. A second tier of countries--Malaysia, Thailand, and Indonesia--has enjoyed rapid economic progress in recent years. Growth was between 5 percent and 7 percent in 1992, and will be about the same or perhaps slightly higher in 1993. As in the case of the NICs, however, Malaysia, Thailand, and Indonesia are experiencing bottlenecks because of insufficient infrastructure and shortages of skilled labor.

The Asian country showing the most rapid growth in 1992 was China, where the economy expanded around 9 percent. Growth in 1993 is expected to be slightly lower. Economic reforms have resulted in large inflows of foreign investment, mainly to the southern provinces around Hong Kong, primarily from Taiwanese and Hong Kong investors. The foreign investment has contributed to the rapid privatization of the Chinese economy. In some provinces private sector output accounts for more than half of all economic activity. The rapid growth in China in the last two years is causing an increase in the rate of inflation; there is concern about it getting out of control as it did in 1988, when inflation reached 20 percent and resulted in an economic austerity drive.

Asian economic reform and development are no longer confined to East Asia and Southeast Asia. Reforms are also being instituted in India and Pakistan. In India, however, the collapse of important export markets in the former Soviet Union has slowed the economy, particularly in 1991 when growth fell to 2 percent. India's economy increased around 3 percent in 1992, and is forecast to do better in 1993.

Africa

Per capita GDP in Africa has declined in real terms for the last three years. For 1992, growth is estimated at just under 2 percent, not nearly fast enough to offset the rapid population increase of about 3.2 percent annually. The economic performance of sub-Sahara Africa has been even worse. In this group of countries (excluding North Africa, Nigeria, and South Africa in the World Bank definition) real per capita GDP has been down 2.2 percent in 1990 and down 1.4 percent in both 1991 and 1992. On average, annual per capita growth in the sub-Sahara region has been negative for the last decade.

While Africa's economies suffer under the weight of internal problems, the impact of slow world growth has also had an adverse effect. Many African nations depend on commodity exports for foreign exchange earnings, but export prices of coffee, tea, other agricultural exports, copper, gold, and other minerals have been low. Slow world growth has also hurt Africa's tourism, an important foreign-exchange earner, especially in East Africa. In 1993, the outlook is African growth of a little over 3 percent, but this will be only enough to keep average per capita income from falling even more.

Middle East

This region (including the European countries of Turkey, Cyprus, and Malta as well as Egypt and Libya in North Africa) grew very little in 1991 as a result of the adverse effects of the Gulf war that affected several key countries in the region. In 1992, growth picked up considerably and is also expected to be strong in 1993. War reconstruction has been an important engine of growth in the region, especially in Saudi Arabia, Kuwait, and Iran. Turkey had one the fastest rates of growth (around 4 percent) in Europe in 1992, and its economy is expected to increase nearly 5 percent in 1993.

Western Hemisphere

Prospects for Latin American growth and development have improved dramatically in the last three years. Successful, although sometimes harsh, economic austerity programs in much of the region have brought inflation under control and have reduced government budget deficits. This has improved the economic climate, and foreign investment has been flowing into the region in record amounts after flowing out during most of the 1980's. Net private capital inflows were an estimated $36 billion in 1991, twice the level of the previous year.

With the major exception of Brazil, by far the largest economy in the region, most countries in Latin America have implemented successful reforms, and their economies have responded. Mexico grew an estimated 3.6 percent in 1991 and around 3 percent in 1992. Argentina reduced inflation from 200 percent per month a few years ago to less than 20 percent per year in 1992. Its GDP increased 5 percent in 1991 and an estimated 6 percent in 1992. Venezuela's growth was about 10 percent in 1991 and almost that amount in 1992. Chile's economy grew nearly 8 percent in 1991 and about 5 percent in 1992. Only Brazil, with inflation exceeding 1,000 percent and almost no growth in 1992, remains in economic disarray.

Latin America as a whole grew by slightly less in 1992 than in 1991, in large part because of the slowdown in the world economy. Most forecasters expect slightly higher increases in Latin America's GDP in 1993. In the case of Mexico, the slow US. economy was one important factor that reduced growth in 1992. Another important reason was a tight monetary policy to reduce Mexico's inflation rate. The government's goal is to cut annual inflation to less than 10 percent.

In the last few years, large inflows of foreign investment have allowed Mexico to finance substantial current account deficits. In 1992, the investments slowed somewhat because of the sluggish US. economy; U.S. exports to Mexico also moderated. Faster Mexican growth of around 3.5 percent is expected in 1993, and US. exports there should begin to grow more rapidly again. Mexico now absorbs more than half of all US. merchandise shipments to Latin America.

Economic Outlook for Eastern Europe and the Former Soviet Union

The restructuring and privatization of the economies in this region are in their third year. The new governments also face the difficult tasks of reducing both the growth of the money supply and government budget deficits. The decline of economic activity is continuing in most of these economies. However, the official data may overstate the size of the decline because they do not include many small private economic enterprises that have sprung up in the chaos of the disintegration of the old centrally planned system.

Undoubtedly, much greater progress toward these goals has been made in some countries of Eastern Europe than in the former Soviet Union. Poland, Hungary, and Czechoslovakia have managed to slow price inflation, privatize some sectors of their economies, and establish many of the necessary institutions and laws to promote the functioning of a market economy. Because of their relative success in making the transition to market economies, these three countries may show some economic growth in 1993.

Bulgaria, Romania, and the former Yugoslavia have not been as successful. Civil war has been raging in large parts of the former Yugoslav state, with reported systematic destruction of its economic infrastructure.

The former republics of the Soviet Union have few of the benefits of Eastern Europe to assist in their transformation. The large-scale enterprises that were established under 70 years of Soviet central planning have significant monopoly power as privatization begins. In addition, the vertical integration of industries often resulted in a reliance on other large enterprises established in different republics, which are now independent countries. The move toward separate currencies, and ethnic rivalries between the republics, make the continuation of economic relationships between these enterprises nearly impossible. For these and other reasons, the newly independent states of the former Soviet Union will require more time to make a successful transformation to free markets.

The World Bank has estimated that the economic decline in the former Soviet Union was slight in 1990, but accelerated to around 9 percent in 1991, and doubled to about 18 percent in 1992. Projections for 1993 are that output in these economies will continue to go down, but perhaps at only about one-third of the 1992 rate. These estimates are only rough approximations at best and conceal large variations in the rates of decline among the 15 republics of the former Soviet Union.

U.S. Export Performance

U.S. Price Competitiveness

The United States continues to be very price competitive in relation to its major export competitors. The value of the dollar fell throughout the spring and summer of 1992, hitting record lows against some currencies. With the breakup of the ERM in mid-September, the dollar recovered some of its value, particularly against the British pound and the Italian lira. By late 1992, the weighted value of the dollar was close to where it was a year earlier.

A comparison of the nominal effective exchange rates (a weighted geometric average of the exchange rates of trading partners) of the United States and other major exporting countries shows the advantage that the United States retains. The US. exchange rate index was at 59.8 in August 1992 compared with the base index of 100 in 1985 (Table 2). The index values for 5 major competitors were all above 100, except for the United Kingdom. Although the dollar has gained in value since August, US. exports retain a significant price advantage. Furthermore, foreign exchange indexes that consider changes in prices, productivity, and the value of a country's currency show even greater price advantages for US. exports. In short, the slowdown in the rate of US. export growth in 1991 and 1992 was the result of sluggish growth abroad, and not the result of a loss in the competitiveness of US. export prices. A pickup in the world economy will result in stronger growth for U.S. exports and continued gains in the US. share of foreign markets.

[TABULAR DATA 2 OMITTED]

Growth of The Major Trading Partners of the United States

The average rate of economic growth of the 10 major trading partners of the United States has been above world economic performance for the last 5 years. Their average GDP growth is also expected to outperform world levels in 1993 (Table 3). This predicted increase shows good potential for US. export growth in 1993. Some caution is in order, however, because much of the expected increase is centered in a few important markets, particularly Canada and Japan. Should the prospects for these two countries prove to be overly optimistic, the outlook for U.S. exports will have to be scaled back. On a more positive note, no country among the top 10 is expected to be in recession in 1993.

[TABULAR DATA 3 OMITTED]

The three largest regional markets of the United States are the Pacific Rim countries, Western Europe, and Latin America, which are all projected to grow slightly more rapidly in 1993 than in 1992. Latin America especially should continue to be a bright spot for US. export growth during the rest of the 1990's.

COPYRIGHT 1993 U.S. Department of Commerce
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