The international economic outlook in 1992

The world economy experienced a generally disappointing performance in 1991, partly because of disruptions associated with the Persian Gulf crisis and the dissolution of the Soviet Union. Although there was strong economic growth in several areas, world output increased by only about 1 percent, marking the third successive year of slower economic growth.

In 1992, the world economy will be stronger. The end of the recession in the United States is the primary reason to expect faster growth among the industrial countries. Consumer spending is expected to lead a U.S. recovery that will be weaker than average. The shallowness of the recession together with weak fundamental conditions in several areas of the economy, especially commercial real estate and Government budgets, will result in a modest rate of growth in 1992. The end of recessions in Canada and the United Kingdom will also add to growth in the industrial countries. As in the United States, consumer spending will play an important role in these recoveries.

Continental European growth will be sluggish in 1992. A disappointing economic performance in Germany, the result of the high cost of reunification and a tight monetary policy, will keep European expansion at low levels. Japan also experienced an economic slowdown in 1991, but inflation and interest rates began dropping at midyear, and its growth rate should begin to improve early in 1992.

Among the developing countries, economic rebuilding in the Middle East and stronger expansion in Latin America are the major forces behind the outlook for faster growth in these countries in 1992. In Latin America, Mexico and several other countries have successfully implemented economic reform programs in recent years, and these programs are beginning to show results. The economic free-fall in the Soviet Union and parts of Eastern Europe is expected to slow in 1992. Although most countries in this region will continue to experience economic declines in 1992 as they proceed with their reform programs, the drop is not expected to be as great as in 1991, barring any unforeseen political upheavals.

Despite world economic problems in 1991, the economic climate is much more conducive to stronger growth today than it was a year ago in the aftermath of the Iraqi invasion of Kuwait. Many uncertainties exist, including the continued unrest in the Middle East, the tremendous problems associated with the restructuring of the economies of Eastern Europe and the Soviet Union, growing concern about global environmental issues, and the many questions surrounding the future direction of the world's trading system. The Uruguay Round of international trade negotiations is continuing in an attempt to resolve difficult issues. Nevertheless, the end of cold war tensions provides a more positive global setting for the world economy than it has had in recent years.

The World Economy in 1991

Following the Desert Storm victory in January, consumer confidence soared in the United States and in other countries. Expectations were high that the recession that had begun in mid-1990 would end soon. On the strength of these expectations, the U. S. dollar rose quickly, gaining around 10 percent in value between February and July.

During the summer, a continuing stream of lackluster economic data dashed the high expectations. The "Anglo-Saxon" recession that began during 1990 in Canada, the United Kingdom, Australia, and lastly, the United States, dragged on. Economic growth in some European economies, notably France and Italy, began to fade. Only strong performance in the economies of Japan and Germany kept the industrial countries as a group from slipping into recession during the first half of 1991.

Data through the third quarter of 1991 point to a reversal of these trends. The economies of Japan and Germany are slowing; those of Canada and the United States are showing signs of renewed growth; and the economic downturns in the United Kingdom and Australia are believed to have bottomed out.

The developing countries presented a mixed economic picture in 1991. Allowing for wide differences within the regions, the developing countries in Asia, Africa, and the Western Hemisphere grew as fast or faster than in 1990. In the Middle East and southern Europe, however, the Gulf conflict and ongoing hostilities in Yugoslavia caused low or negative growth for many developing countries. In general, however, the economic impact of the Middle East crisis outside the region has been limited to slight increases in inflation and interest rates, and modest decreases in economic growth.

The most abrupt decline in economic growth in 1991 occurred in the countries of Eastern Europe and the Soviet Union. The process of economic reform - involving not only the transformation these economies to market-based systems, but also their reintegration into the world economy - resulted in sharp economic downturns in the region. Indeed, only the fact that these economies are so isolated from the rest of the world kept their rapid decline from affecting world output and trade more forcefully than it has. National output in the Soviet Union and Eastern Europe declined by an estimated 10 percent in 1991; the most serious downfall occurred in the Soviet Union where output dropped by 15 percent or more.

The deceleration of world growth has reduced inflationary pressures. During the past 3 years, capacity constraints have eased in all but a handful of countries. The slowdown resulted mostly from the tighter fiscal and monetary policies imposed in the late 1980's in response to threats of overheating, as the long economic expansion of the previous decade pushed many economies to full capacity. Prices of materials, including energy, which declined throughout most of the 1980's, have remained low. Unemployment has been increasing in many industrial countries, reducing wage demands and, therefore, labor costs.

The outlook is for generally lower rates of inflation in 1992. Consequently, authorities in many countries have been easing monetary policy. In response, interest rates have fallen throughout most of the industrial world.

In line with recent forecasts of faster economic growth in 1992, the outlook for world trade is also more optimistic. The International Monetary Fund (IMF) recently predicted that world trade volume will expand by 5 percent in 1992, compared with an estimated increase of less than 1 percent in 1991 and 4.3 percent in 1990. Economic disruptions caused by the Gulf conflict and the breakup of the Council for Mutual Economic Assistance (CEMA) trading bloc among the Soviet Union and its allies have played an important role in the slow growth of world trade volume in 1991.

The Economic Outlook for Industrial Countries

The industrial countries are expected to grow on average at a rate of between 2.1 and 3.1 percent in 1992, more than twice as fast as in 1991 (Table 1). The United States, Canada, and Japan will have the fastest growth among the Group of Seven (G-7) major industrial countries, with France and Italy not far behind. Germany and the United Kingdom will have the slowest growth. Among the G-7 countries, Germany and Japan were in cyclical downturns in late 1991, while the other five countries began to experience economic recoveries.

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Western Europe

Western Europe is undergoing the most profound changes of any region in the world, with the possible exception of Eastern Europe and the Soviet Union. These changes include: greater economic integration of the European Community (EC) toward a single market, in what has come to be known as "EC 92"; the reunification of Germany; the movement toward a European Monetary Union (EMU); and, most recently, the October 1992 agreement between the EC and the European Free Trade Area (EFTA), creating the 19-country European Economic Area.

Although these developments create the promise of enormous future economic potential, the short-run outlook for Europe is uncertain. The cost of reuniting Germany has proved to be greater than expected. Since the reunification process began in July 1990, the costs to the government have soared, a large fiscal deficit has developed, Germany's balance of payments surplus has disappeared, and inflation has increased. In response, new taxes have been imposed, and the Bundesbank (central bank) has tightened monetary policy. The result is that after strong growth in the first quarter of 1991, the German economy began slipping. The current forecast is an increase in gross domestic product (GDP) of between 1.2 and 2 percent in 1992, perhaps half the estimated growth of 1991.

In the United Kingdom, the economy has been in recession since the summer of 1990. As in the United States, a lack of consumer confidence and spending kept the lid on economic growth. Recently released data suggest that the economy has bottomed out. British GDP appears to have increased marginally during the second half of 1991, and growth between 1.3 and 2.7 percent is expected in 1992. The economic slowdown has been fostered by the government's commitment to joining the Exchange Rate Mechanism (ERM) in Europe as a prelude to membership in the proposed EMU. To this end, the government has pursued tight monetary and fiscal policies, bringing inflation rates and interest rates down to a level compatible with those of Germany and the other ERM members, but at the expense of lower growth and higher levels of unemployment.

Economic activity in the other major Western European countries, France and Italy, began slowing in late 1990. Tepid economic growth continued throughout 1991. Both should rebound with more rapid growth in 1992, despite the projected sluggish growth of Germany, a major export market for both countries. Inflationary developments in France and Italy have sharply diverged. France has pursued tight fiscal and monetary policies in recent years in an all-out fight against inflation. This effort has been successful; France has one of the lowest inflation rates among the industrial countries. High rates of unemployment persist, however. In Italy, on the other hand, inflation has been a problem, and the government deficit is large, running about 10 percent of GDP. Efforts to control the budget and inflation have not been fruitful, and the growth predicted for Italy in 1992 is not very robust. Unemployment remains high, around 11 percent.

Asia and Australia

In Japan, a very high annual rate of growth (11 percent) in the first quarter of 1991 was followed by a fall in the economy during the second quarter as most areas of domestic spending and exports declined. Japan entered a "growth recession" in the second quarter, and the economy grew at less than its potential during the remainder of the year. A slowdown in consumption led the economic deceleration. All other sectors were affected by the tight monetary policies that began to be relaxed in July. A fall in imports - in response to the decline in consumption - and an appreciating Japanese yen resulted in a sharp increase in the size of the Japanese trade surplus in 1991. Economic output is expected to increase at a faster pace in early 1992 as consumer confidence returns, but the year-over-year growth in 1992 will be smaller than in 1991.

In Australia, export markets for its important commodities have been depressed. This situation has kept investment spending low in the affected industries. Although the current recession is expected to end soon, growth in 1992 is expected to be modest.

North America

A year-long recession in Canada ended in the second quarter of 1991, countered by a burst of activity that pushed the economy forward at a 5 percent annual rate. The growth was led by higher consumer spending, positive net exports, and increased housing construction. Rising consumer confidence.,and increases in real incomes should encourage the economic recovery. Canada's growth rate in 1992 will be about 2.5 percent to 3.5 percent. However, its economic performance will be constrained by the sluggish growth of the U.S. economy (because of close ties between the two economies) and by low prices for Canada's materials exports.

Although the recession in the United States technically ended during the third quarter of 1991, the U.S. economy remains sluggish. Consumer spending increased during the spring, but falling inventories reduced GNP slightly during the period. The recovery is unlikely to be as strong as past upturns. Consumers are not in a position to increase spending at a rapid rate. Real income and savings rates fell during the recession, and levels of consumer debt remained high. These conditions will prevent consumers from returning to the stores in strength. Government spending, constrained by budget deficits, also will add little to the recovery. In 1992, exports will continue to grow about as rapidly as in 1991, and add to the economic expansion. Imports, however, will also increase as the economy grows, and the trade deficit, which was about $65 billion in 1991, may increase slightly in 1992.

The Economic Outlook for Developing Countries

Overall, the developing countries grew slightly faster in 1991 than estimated growth of about 3 percent in 1990. Stronger economic performances in Africa, China, and Latin America offset sharp war-related declines in the Middle East and in the European developing countries, primarily Turkey and Cyprus.

The outlook is for even faster growth in 1992 as conditions become more normal in the Middle East. Also, several countries in Latin America are expected to grow more rapidly, reflecting the effects of the economic stabilization and restructuring programs that have been implemented in recent years. On the downside, the decade-long trend of low commodity polices continues to hurt the export earnings of many developing countries.

Asia

Ten years of rapid growth have confronted several Asian countries with resource and infrastructure problems that may limit their future growth. The countries that are most affected are Hong Kong, Singapore, Taiwan, South Korea, Thailand, Indonesia, and Malaysia. Although the constraints differ from country to country in degree and in character, they include shortages of roads, transport facilities, telecommunications, utilities, and skilled labor. Most of these countries have undertaken public investment programs to address these problems, and a larger share of their future growth will come from public sector investments than from exports. These infrastructure deficiencies may divert some foreign manufacturing investment to other countries in the region. Despite these problems, growth in the seven countries as a group was apparently about 7 percent in 1991 and will be about the same in 1992.

In China, the political turmoil that disrupted growth in 1989 and 1990 is receding. In 1991, growth was about 6.5 percent compared with a 5 percent advance in 1990. In 1992, output is projected to increase about 7 percent. Much of the rapid economic development in China in the last 10 years can be attributed to foreign investment, particularly by Chinese from Hong Kong and Taiwan, in the |special economic zones' that have been set up in China's south coastal areas. These regions are booming and are the source of most of China's burgeoning exports of manufactured goods.

The remaining large Asian countries have not grown as rapidly as China and the seven Asian countries previously noted; this situation is expected to continue in 1992. Some of the countries in South Asia, notably Bangladesh, India, and Sri Lanka, were adversely affected by the Gulf conflict. Lost earnings from guest workers in and exports to Kuwait and Iraq will continue to slow South Asian economies in 1992. Other factors that continue to affect these countries include political unrest, economic structural problems, and natural disasters - floods in Bangladesh and the eruption of Mt. Pinatubo in the Philippines were particularly harmful.

Africa

Throughout most of the 1980's economic growth in developing Africa was minimal. With annual population growth estimated at about 3 percent, per capita income fell rapidly. Policy reforms in many countries have not been able to overcome the substantial problems of the region, including deteriorating infrastructure, high population growth, drought and desertification, mounting debt-service obligations, and falling export commodity prices. The decline in commodity prices, particularly those for such cash crops as coffee and cocoa, has been especially harmful. Only the oil-exporting nations (the countries in North Africa plus Nigeria, Congo, Gabon, Cameroon, and Angola) have managed some growth in per capita income.

In 1990, the estimated growth of developing Africa was 2.3 percent, below the increase in population. Growth in 1991 is estimated to have risen slightly, to about 3 percent, and is projected at 3-3.5 percent in 1992.

South Africa is in the middle of a recession that began in 1989. It stemmed from a combination of factors, including slower growth in the United States and the United Kingdom, the Gulf crisis, a tight monetary policy, and continuing uncertainty about the political future of the country. GDP is thought to have fallen by 2 percent in 1991. A moderate rebound is forecast for 1992, with expected growth of about 1 percent.

Middle East

The Gulf crisis severely affected this region. The two major participants, Iraq and Kuwait, have suffered immense destruction, while other Middle Eastern countries (mainly the non-oil exporters) that supplied Kuwait and Iraq with exports and workers have lost important sources of foreign earnings. The oil exporters of the region that were not directly involved in the war managed some short-term economic benefits when the price of oil increased in 1990 as a result of the crisis. Overall, the economies of the region apparently declined by 3.5 to 4.5 percent in 1991. A sharp rebound in growth is expected in 1992, but this will depend partly on the process of economic reconstruction in Kuwait and Iraq, particularly the resumption of oil exports.

Western Hemisphere

Most countries in Latin America are performing better than they have in many years. Following the politically and economically disruptive decade of the 1980's, stability has returned to much of the region, economic reforms and stabilization policies have been or are being implemented, economic growth is up, and inflation is down.

In recent years, no country in the region has been doing better than Mexico. Following the decline in GDP during 1983-87, stabilization programs and economic reforms have transformed the economy. Growth in 1990 was an estimated 3.9 percent and exceeded 4 percent in 1991. In 1992, GDP may expand as much as 5 percent. Mexican authorities have waged a vigorous campaign to lower inflation, with excellent results. The annual increase in consumer prices is projected to be down to about 10 percent in 1992, 4 years after annual inflation exceeded 100 percent. A concerted effort to reduce the government deficit has been a major factor in this effort. Today, the government budget is nearly in balance, helped in part by the continuing sale of government-owned businesses, such as banks and the national telephone system. The new stability in Mexico, together with the expectation of the North American Free Trade Agreement (NAFTA), has resulted in a large influx of capital, including the return of flight capital that left the country during the turbulent 1980's.

Other countries in Latin America have also met with success in stabilizing their economies. Several, including Chile, Venezuela, and Columbia, have instituted reforms and are expecting better than average growth in 1992. Many problem areas remain, however. Brazil's efforts at reform have proceeded in a halting manner, fiscal and monetary policies have had little success, and rapid inflation persists.

The Economic Outlook for Eastern Europe and the

Soviet Union

This region faces severe economic and political problems. Economic growth has been negative in most of these countries for 3 years. For the region as a whole, the decline was in the double-digit range in 199 1. A less rapid drop in output is hoped for in 1992, but this is contingent on the speed and success with which reforms are implemented, and, perhaps most importantly, whether some semblance of political stability can be maintained in the process.

Economic conditions in the region vary considerably. Poland, Hungary, and Czechoslovakia have made the most progress in implementing reforms, including establishment of the legal and structural framework necessary for the privatization of the economy and the inflow of foreign investment. These three countries have the best prospects of reversing their economic decline in the near future. Bulgaria and Romania not only face serious political problems but also were adversely affected by the Gulf crisis. Yugoslavia, which had the most liberalized economy of any country in the region, has seen its political problems escalate to a state of civil war. Foreign trade in all countries in Eastern Europe has plummeted, in large part because of the dissolution of CEMA in January 1991.

Economic decline in the Soviet Union probably reached 15 percent or more in 1991. The political situation is so uncertain that economic projections for 1992 and beyond are highly speculative. The republics of the Soviet Union are moving toward some degree of independence, and their future economic relationships are under discussion, including the possible maintenance of a common currency. What is known is that grain production in 1991 fell by 20 percent, coal and oil output dropped by at least 10 percent, and manufacturing output plummeted. The Soviet Union has applied for membership in the IMF and has requested foreign assistance, including short-term food and material supplies and financial assistance with its international debt obligations.

U.S. Export Performance

U.S. price competitiveness continues to be good, based on the usual international comparisons of prices, exchange rates, and productivity growth. Although the dollar gained considerable value, around 10 percent, between February and July 1991, it retreated in the second half of the year and by mid-November was only about 1 percent above its value in January 1991.

The IMF's index of real exchange rates shows that the dollar is in a more competitive position today in relation to the currencies of its major industrial country competitors than it was in 1988-90, the years of very rapid U.S. export growth. The dollar may gain some value in early 1992 if the economy improves as projected, attracting foreign capital investment. However, the gain is unlikely to significantly harm the competitive position of U.S. exports in 1992.

On average, the economic performance of the major trading partners of the United States has been slightly better than that of the world economy since 1978 (Figure 1). Their GDP growth is expected to continue to be above world levels in 1992. Table 2 shows data on the economic growth of the 10 leading buyers of U.S. manufactured goods in recent years, as well as the forecast for their growth in 1992.

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The projected growth rate of the 10 countries is nearly twice as great as in 1991, and in 3 of the countries - Canada, the United Kingdom, and Australia - declines in 1991 are expected to give way to renewed growth in 1992. Therefore, the markets for U.S. exports to these countries are likely to expand, and U.S. exports can be expected to increase.

On a regional basis, the three biggest U.S. export markets - the Asian Pacific Rim countries, Western Europe, and Latin America - are all projected to register economic growth in 1992 that is as good or better than in 1991. Particularly encouraging is the economic rebound in Latin America, especially Mexico, because this region has been an important market for the United States. The economic collapse of Latin America in the 1980's was one of the major reasons for the large trade deficits that the United States registered then.

COPYRIGHT 1992 U.S. Department of Commerce
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