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World Economic Outlook: Tepid global recovery predicted, with normal growth resuming early 2004

International Monetary Fund. External Relations Dept.
Published Date:
April 2003
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Clearly, as the April 2003 World Economic Outlook (WEO) indicates, concerns over the potential war in Iraq, volatile oil prices, a drop in confidence, and skittish financial markets all weighed heavily on the global economy in the two months before the outbreak of war. If it is war jitters alone that are forestalling the recovery, if oil prices turn out to be significantly lower than the baseline assumption for the WEO projections, and ifglobal productivity growth is even more robust than the WEO projects, the global economy could turn around more quickly, Kenneth Rogoff, Director of the IMF’s Research Department, said in an April 9 press briefing. (The full text of the briefing is available on the IMF’s website (

GDP growth will be weaker than expected

(Percent change from four quarters earlier)

1Australia, Canada, Denmark, euro area, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States.

2 Newly industrialized economies: Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.

3 Indonesia, Malaysia, the Philippines, and Thailand.

4 Czech Republic, Hungary, Israel, Pakistan, Poland, Russia, South Africa, and Turkey.

5 Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.

Data: Haver Analytics; IMF, World Economic Outlook, April 2003; and IMF staff estimates

This is now more likely than it was before the war began, he added, but it would be a mistake to think that “it was just the war.” A number of other risks also weigh on the outlook, including:

  • the continuing unwinding of the equity price bubble;
  • the emerging risk of a housing price bubble in some regions;
  • financial imbalances around the globe, including the present patently unsustainable constellation of current accounts;
  • structural weaknesses in Japan and Europe (especially Germany);
  • continuing security concerns, which are obstructing globalization; and
  • sundry further risks, including fragilities in emerging markets and the recent outbreak of Severe Acute Respiratory Syndrome (SARS).

Global security perceptions may not return to pre-September 11 levels for decades to come, Rogoff noted, which means higher insurance costs, weaker confidence, higher trade costs, and slower global economic integration. Ultimately the notion of”normal” global growth could fall from 4 percent to, say, 3.75 percent, though good policies, such as broad-based structural and institutional reforms, could counteract the security factor many times over.

There are aspects of the security factor that are difficult to project or quantify but that might exact a real and long-term cost. In response to a reporter’s question, for example, Rogoff explained that the United States might suffer economically more than the rest of the world if it becomes more difficult for foreign students to study in the United States and obtain work permits. Traditionally, many of these students stayed on to become very productive members of the U.S. economy. If that no longer occurs, there will certainly be a significant loss in terms of innovation and growth to the United States, though the countries of origin could benefit, since they would likely retain these students.

Regional outlooks lackluster

As for prospects in individual countries and regions, Rogoff noted that the United States, accounting for just over one-fifth of global GDP, is projected to have 2.2 percent growth in 2003—not enough to make a meaningful dent in unemployment—and 3.6 percent growth in 2004. Growth in the euro area (which contributes about one-sixth of global GDP) is again lackluster at 1.1 percent in 2003 and 2.3 percent in 2004. Japan remains mired in a slump at 0.8 percent growth for 2003 and 1.0 percent for 2004. Emerging Asia is, in fact, the fastest-growing region of the world at 6.0 percent for 2003 and 6.3 percent for 2004, though the IMF does not view this recovery as self-sustaining if the rest of the world slumps and the incipient SARS epidemic takes a toll (reducing the projected growth rate by perhaps ¼ -½ percent if the epidemic lasts for one quarter).

Transparent monetary policy needed

A change in the monetary policy communication strategy of major central banks is clearly needed, Rogoff said, adding that the time has come for the European Central Bank (ECB), the Bank of Japan, and the U.S. Federal Reserve to become more transparent about their inflation objectives. This would help central banks fend off deflation—already present in Japan and an outside risk in Europe and the United States.

In Japan, more aggressive monetary easing—still sorely needed—would be considerably more effective if anchored by a communication strategy stating that the Bank of Japan intends to end deflation soon and reiterating that it has the capacity to do so, Rogoff stressed. The risks to this strategy would be reduced, and the benefits magnified, if determined monetary easing were accompanied by comprehensive bank and corporate restructuring.

In Europe, a more transparent and more symmetric inflation target is desirable. As the ECB reconsiders its monetary strategy, it should also consider adopting a higher central target inflation rate of, say, 2.5 percent. A higher central inflation rate would reduce the likelihood of deflation prospects in weaker economies, currently Germany. If and when accession countries join the euro area, economic divergence will be even greater, and an even higher central inflation rate might be contemplated.

Finally, even acknowledging the consistent outstanding performance of the U.S. Federal Reserve, Rogoff said, it is hard to see the arguments for remaining less than completely transparent about its broad medium-term inflation goals. In the admittedly unlikely event deflation were to set in, having a communication strategy already in place would make reversing the process far easier, and substantially alleviate the need for the kinds of unconventional measures, such as the purchase of securities, now being vetted. And more transparency on inflation would alleviate anxiety over any eventual transition to a post-Greenspan era—a transition that Rogoff, for one, said he hoped would not come for a long time. Some central banks might view enhanced inflation transparency as placing them on a slippery slope toward rigid inflation targeting—which would indeed be less than ideal—but on balance, such risks are not high enough to justify continuing with the current communication strategies.

In response to a reporter’s question, Rogoff explained that he proposes a 2.5 percent target in the euro area because the region is less integrated economically than, say, the United States. A monetary policy appropriate for the area as a whole might be quite deflationary for some of the weaker economies, especially if one includes the accession countries. That, then, argues for a slightly higher inflation target that would minimize the risks of deflation across the euro area.

Growth projections revised downward(annual percent change)
Difference from
September 2002
Current ProjectionsProjections1
World output2.
Advanced economies0.
United States0.
Euro Area1.
Newly industrialized Asian economies0.
Developing countries3.
Developing Asia5.
Middle East and Turkey21.
Western Hemisphere0.6-
Countries in transition5.
World trade volume (goods and services)
Oil (U.S. dollars)3-13.92.824.2-19.42.325.0
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during February 7-March 7, 2003.

Using updated purchasing-power-parity (PPP) weights, summarized in the WEO Statistical Appendix, Table A.

Includes Malta.

Simple average of spot prices of U.K., Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $25.00 in 2002; the assumed price is $31.00 in 2003, and $25.00 in 2004.

Data: IMF, World Economic Outlook, April 2003

Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during February 7-March 7, 2003.

Using updated purchasing-power-parity (PPP) weights, summarized in the WEO Statistical Appendix, Table A.

Includes Malta.

Simple average of spot prices of U.K., Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $25.00 in 2002; the assumed price is $31.00 in 2003, and $25.00 in 2004.

Data: IMF, World Economic Outlook, April 2003

The IMF recommends more transparent inflation goals for all the major central banks, Rogoff said. With regard to Japan, it advises avoiding a narrow inflation target. Indeed, as Rogoff observed, it will be very difficult for Japan to hit the target of a narrow band for inflation. Getting out of the current situation where conventional monetary policy is ineffective and interest rates are zero is like being caught in a sand trap in golf, he said: “You have to hit the ball pretty hard to get it out of the sand trap. If you’re Tiger Woods, you can get it on to the green in one shot, but most others might wander off a ways at first.” A clear communication strategy by the Bank of Japan, however, would indicate what it would like the general range for inflation to be in the medium term and thus help anchor expectations.

Adjusting to getting old

As for fiscal policies, all the major industrial countries must come to terms with the implications of serious aging problems over the coming years, Rogoff said. Problems in sustaining pensions and health care will arise very soon in Japan and many countries across Europe. Given the current low birth rates, it is just not possible for people to go on indefinitely living longer and retiring earlier, happy though that image may be. For many industrial countries, age-related government expenditure is expected to rise by 5-10 percent of GDP between now and 2040, a number that swamps much current budget arithmetic. Raising the age of retirement has to be one piece of any solution, and implementing such a policy is as important as any measure most industrial countries could take toward medium-term fiscal sustainability. Germany is in a difficult economic situation, Rogoff said, partly because of the ongoing costs of German reunification. Productivity differentials between east and west Germany had been closing initially but have not done so for several years. Now, major structural reforms are clearly needed, in particular labor market reforms. The recent initiatives of Chancellor Gerhard Schroeder are a step in the right direction.

A study in the April 2003 World Economic Outlook concludes that if labor market institutions in Europe, Rogoff: more transparent inflation goals are recommended for all the major central banks. including practices such as unemployment insurance, benefits, and labor taxes, were brought to U.S. levels, unemployment in the euro area would fall by 3 percent and consumption and investment would rise by 5 percent. And if product markets were deregulated to U.S. levels, the gain in output effects would double to almost 10 percent. One could say, remarked Rogoff, that “the typical European worker is seeing five weeks a year of pay sucked into a black hole through these various inefficiencies.”

Photo credits: Denio Zara, Padraic Hughes, Pedro Marquez, and Michael Spilotro for the IMF.

U.S. tax cuts ill-timed

Asked to comment on pending proposals to cut U.S. taxes, Rogoff responded that the timing was awkward, given the open-ended nature of potential costs from the war in Iraq and Iraq’s eventual reconstruction. He did, however, sympathize with the desire to eliminate double taxation of dividends, which over the long term might enhance growth. The United States is the greatest engine of economic growth in the history of the modern world, he added, but from the perspective of the global economy, more balanced demand—with continental Europe and Japan growing faster—is a better way to stimulate global demand than cutting U.S. taxes. If the tax cuts were accompanied, say, by planned expenditure cuts or some type of pension reform, such as the phasing in of higher retirement ages, the IMF’s concern about the medium-term sustainability of the cuts would be much less.

Copies of the World Economic Outlook, April 2003, are available for $49.00 ($46.00 for academics) each from Publication Services. See page 105 for ordering information. The full text of the World Economic Outlook is also available on the IMF’s website (

Laura Wallace


Sheila Meehan

Senior Editor

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Assistant Editor

Christine Ebrahim-zadeh

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Contributing Editor

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