The International Economy.

• Author: Hauskrecht, Andreas

World economic growth for 2002 is estimated at 2.2 percent, measured in terms of real Gross Domestic Product (GDP), compared to growth rates of 4.7 percent in 2000 and 2.2 percent in 2001. The International Monetary Fund in Washington forecasts world economic growth for 2003 at a disappointing 2.8 percent and points to evidence for a probably even lower growth rate.

The world still lacks a power engine, a growth locomotive to help pull other regions out of economic struggles. The recovery in the U.S. and Europe is delayed and more modest than originally hoped. Japan is still stuck with a combination of deflation and a very low growth rate of GDP with the imminent risk of falling back into recession. Moreover, Latin America is on the brink of an economic collapse. Gleams of hope are the prospects for Southeast Asia and, to a smaller extent, for Middle and Eastern Europe and Russia (see Table 1).

Europe

Despite already modest forecasts for the growth rate of real GDP, the core European countries performed even worse than predicted. Germany's growth rate of real GDP in 2001 was a diminutive 0.5 percent. France, Italy, and the United Kingdom all showed growth rates of GDP below 2.0 percent. The picture for 2003 looks only slightly brighter with an expected economic growth rate of 2.3 percent for the European Union.

The explanation for this gloomy outlook is multifaceted. With low domestic demand, Europe's economic prospects depend largely on dynamic export growth. The dramatic stock market price decline further weakened domestic consumption and investment. Universal banks and life insurers keep huge unrealized losses from large equity holdings in their balance sheets that depress lending. In contrast to the U.S., and not well understood by economists, productivity growth in Europe is declining and tarnishes growth perspectives. Considering the rapid aging of European society, far-reaching reforms of the social insurance schemes and the labor markets are urgently needed. While current interest rate levels are appropriate for Euro-member countries with inflation rates above 3.0 percent (such as Ireland and Spain), they are clearly too high for Germany, Italy, and France. Furthermore, the strict rules of the stabilization pact do not allow the needed fiscal stimulus.

North America

The best guess for the U.S. economy is a continued but modest economic recovery and a growth of real GDP slightly above 3.0 percent. Productivity growth rates are...