The Global Economic Outlook.

(From Journal of Japanese Trade & Industry (JJTI))

Byline: David Hale

There are increasing signs that the world economy is posed for a broad based recovery after nearly three years of sluggish growth or recession in the leading industrialized countries. The U.S. economy enjoyed a robust growth rate of 8.2% during the third quarter and appears likely to enjoy 4-5% output growth during the fourth quarter. The Japanese economy has enjoyed a growth rate of 2.0-3.0% during recent quarters as a result of gains in both consumption and investment. There has been a steady improvement in German business confidence during the past few months. The Bank of England is so concerned about the resilience of domestic demand and real estate prices that it may raise interest rates in the near future.

The rebound in the U.S. economy is clearly policy driven. The Federal Reserve has reduced short-term interest rates to the lowest level since the mid-1950s. The federal fiscal surplus of over $200 billion three years ago has turned into a deficit approaching $500 billion. The dollar has fallen sharply since early 2002 against the currencies of Europe, Canada, Australia, South Africa and New Zealand.

European policy is less simulative than in the United States but it is not as restrictive as it might have been. Germany and France are going to let their budget deficits expand to 4% of gross domestic product (GDP) despite the European growth and stability pact. The European Central Bank has reduced its core interest rates to 2.0% or the lowest level of interest rates for Germany since the country was created. The German government is initiating a number of structural reforms to make the labor market more flexible and reduce health care costs for the private sector.

In Japan, monetary policy has been highly expansionary since Fukui Toshihiko arrived at the Bank of Japan in March 2003. There has been a huge increase in unsterilized currency intervention as well as an expansion of the target for bank reserves. The stock market responded positively to these policy gestures and has risen sharply since May.

Ironically in view of its strong third quarter growth, the most high-risk country in the outlook is the United States. The Bush administration has presided over 2.7 million job losses since 2001 and is facing great criticism from Congress over the issue of trade policy. No other American president has experienced such large job losses since Herbert Hoover during the Great Depression. Even the presidents we associate with economic failure have outperformed George W. Bush. Gerald Ford produced 2 million jobs despite a severe recession during 1975. George Bush senior produced 2.8 million new jobs despite slow growth and a recession at the time of the Gulf War.