The international economy.

• Author: Hauskrecht, Andreas

Economic growth in the world is likely to come in at 3.2 percent for 2003, measured in terms of real Gross Domestic Product (GDP), compared to growth rates of 2.4 percent in 2001 and 3.0 percent in 2002. The International Monetary Fund in Washington (IMF, World Economic Outlook, Fall 2003) forecasts world economic growth for 2004 at 4.1 percent, with a rather high degree of confidence that the worldwide upturn will continue.

The forecast predicts an economic upswing for essentially all world regions, with the significant exception of Japan. As in the last few years, the world depends notably on the U.S. as the economic powerhouse that helps other regions pull out of their economic struggles. The economic growth path in the U.S. is expected to be robust, while recovery in Europe is further delayed and more modest than originally hoped.

Like last year, China and India are expected to show very robust economic growth in 2004; however, their combined GDP adds up to a relatively modest 16 percent of U.S. GDP, clearly not enough to displace the U.S. as the world economic growth locomotive (see Table 1).

Europe

Europe had another disappointing year with real GDP growth around 0.5 percent--well below expectations. Germany even experienced another (albeit short) recession. In 2003, German GDP remained flat. France, with an expected real GDP growth of 0.5 percent, and Italy, with 0.4 percent growth, performed only marginally better.

The outlook for 2004 looks slightly brighter with an expected real GDP growth rate of 1.9 percent for the entire euro area. Although on a modest level, the United Kingdom outperformed continental Europe in 2003 with a GDP growth of 1.9 percent and will enjoy a somewhat higher growth rate of around 2.4 percent in 2004.

Clearly, the disappointing German performance pulled down the rest of Europe. The shrinking of the construction sector that exploded during post-unification years alone contributed to a decrease of GDP growth of around 0.3 percent. Although the European Central Bank has further eased monetary policy in 2003, real interest rates in Germany are not particularly low, given the very low inflation of 1 percent. The so-called stabilization pact (ironically a German invention) restricts the use of fiscal policy to stimulate domestic demand. Financial institutions groan under a huge burden of nonperforming loans, a bit similar to the situation in Japan. Consequently, banks are more careful with new lending.

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