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IMF says world economic growth continues at satisfactory pace helped by buoyant growth in many emerging market countries

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MO.271 P002


IMF Says World Economic Growth Continues at Satisfactory Pace Helped by Bouyant Growth in Many Km trying Market Countries

The International Monetary Fund (IMF) said that world economic growth has continued, on average, at a satisfactory pace, supported in particular by buoyant growth in many emerging market countries - It noted in its latest World Economic Outlook, however, growth slowed more markedly than expected during 1995 in western Europe and North America, leading to further increases in unemployment in some countries from already high levels and also to fears of a new economic downturn. In response, short-term interest rates have been reduced significantly and seven) countries have taken various fiscal and structural measures to revive confidence and stimulate job creation. While growth bis clearly slowed below potential in some cases, the factors that appear to lie behind the slowdown are likely to prove temporary. There arc also now clearer signs of an upturn in Japan. Overall, there do not seem to be grounds to expect a prolonged ot generalized slowdown, and global growth is projected to pick up to around 4 percent a year in 1996 and 1997 from the rate o f 3 Vi percent to which it slipped list year.

In fact, a number of positive trends and developments point to the likelihood o f continued, relatively solid world growth in the period ahead. Global inflationary pressures remain subdued. Notwithstanding an upturn in bond yields since January, real long-term interest rates are significantly lower than in most of the period since the early 19806, owing in part to perceptions of stronger commitments to the reduction o f fiscal imbalances in many

industrial countries. Equity prices have continued to rise, reflecting strong profit performance as well as lower interest rates. And exchange rates among the major c u rre n c ie s have returned to levels more consistent with fundamentals, following the misalignments that arose in the spring of 1995. The correction o f the overshooting of the yen has been particularly helpful in brightening the outlook for the Japanese ecoflbmy.

M o iio v tr, capital flow» to emerging market countries have boon gone rally well curtained following the containment of spillover effects from the M o icai crisis. In the transition economies o f central and eastern Europe, the momentum of growth seem* to have been stronger than projected last fall. Some o f the poorest countries, especially in Africa, have strengthened their growth performance and prospects as a result o f intensified adjustment efforts. And world trade has continued to expand faster than past relationships between output and trade growth would seem to predict, reflecting the liberalization of trade sad the trend toward current account convertibility m recent years together with the dynamic forces of globalization. Clearly, progress in implementing policies consistent with the global strategy set out by the Interim Committee three years ago, and reaffirmed in its October

1994 Madrid Declaration, has brought significant results in many areas.

At the same time, it is apparent that many problems need to be addressed more adequately to strengthen growth in the medium to longer run, to reduce risks of adverse financial market reactions, and to enhance countries' resilience to economic disturbances Despite some progress, budgetary unbalances in industrial countries remain a source of upward pressure on real interest rates and thus continue to crowd out private investment. Not only do these fiscal problems need to be addressed in a timely manner, but also early reforms

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of pennon aod health systems are needed to pre-empt even greater budgetary pressures in the future as populations age. There has been considerable progress since the early 1980s is the deregulation o f financial markets and in other structural reforms, including further trade liberalization. In many countries, however, and especially in Europe, reforms o f labor markets remain essential to reduce «tructurd unemployment aod to help alleviate fiscal imbalances.

Most developing countries have reduced fiscal imbalances substantially during the past decade. Together with trade liberalization and other structural reforms (his has contributed to their robust economic performance in recent years. Many, however, continue to divert scarce resources from productive investment through large fiscal deficits. In addition, quasi-fiscal or off-budget involvement by governments in economic activity adversely affects economic incentives tod growth in many countries. The transition countries also have achieved remarkable progress toward macroeconomic stability, tod their budgetary imbalances have narrowed sharply. But in many cases fiscal

deficits a rt still too large, aod continuing government intervention in the economy on behalf o f ailing sectors, including through off-budget operations, often remains a threat to (he sustainability of recent reductions in inflation. Since such interventions are shielding enterprises and consumer! from full exposure to trutket forces, these practices are also delaying the process of structural transformation and jeopardizing the prospects for sustained economic recovery.

Because many of these macroeconomic and structural policy challenges, which are often interrelated, are in the fiscal area, fiscal policy receives special attention in this issue of (be World Economic Outlook.

Industrial Countries

Industrial country growth In 1995 was somewhat weaker than projected six months ago as the pace of expansion slowed significantly during the year in most countries. The slowdown, however, was far from uniform and was desirable in some cases to prevent the buildup of inflationary pressures. In die United States, although growth moderated to only 1W percent in the year to the fourth quarter of 1995, the economy, five years into its expansion, remained close to full capacity utilization; and by early 1996 there were signs o f a renewed pickup. In Japan, activity remained lackluster under the influence of the strong yen and the uncertainties resulting from mounting problems in the financial toe tor,-but by year rend, there were growing signs that the recovery was under way. In Europe, performance differed aonrewhat between the countries whose currencies have depreciated in recent years—including Italy, the United Kingdom, Sweden, and Spain—and the strong currency countries—Germany, France, other countries whose currencies have been kept closely linked to the deutsche mafic, and Switzerland. In the former group-the 'outer ring'-grow th was better sustained and the slowdown that did occur was helpful m codtiunJcg above-average inflation rates. In the hard currency group— the "inner core’—activity stagnated tn the second half of 1995 and unemployment turned upward again before the recovery bad made much headway.

Developing Countries

The growth momentum o f many developing countries and the developing w orld's increased resilience to external disturbances, noted m earner issues or me world Economic wmlook, are strung reasons -u nxpevi iL»i the recent weakness in some industrial countries will not extend to a generalized global slowdown. The emerging market economies o f Asia are likely to remain particularly buoyant, although growth is expected to moderate in several o f them. This should help to alleviate inflationary pressures and reduce current account imbalances associated in part with large private capital inflows.

Transition Countries

Many of the traw tinn countriec have achieved considerable progress with macroeconomic stabilization and reform, mad the fruit* o f their effort» to transform their economies are increasingly Visible. Clearly, the transition process is working.

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