World Economy - The world economy posted unexpected growth in 2003. The first estimates published by UN organizations indicate that the global economy in 2003 grew at a higher rate than in 2002, at 2.5% in 2003 compared to 1.7% in 2002. However, this growth varies considerably across the world. Whereas the most affluent economies of the world are not growing as strongly as they were once, equally some of the poorest economies in Africa are not growing either, or growing at very low rates. Meanwhile, the oil exporting economies, China, ASEAN countries and South Asian countries are growing at rates far beyond the world average.
Key Global Economic Indicators, Yearly Growth in %, 2000-2003
| 2000 | 2001 | 2002 | 2003 |
World Economic Growth (GDP) | 3.9 | 1.4 | 1.7 | 2.5 |
Developed Economies | 4.6 | 2.2 | 2.7 | 3.3 |
- Japan | 3.4 | 1.0 | 1.2 | 2.0 |
- USA | 3.7 | 0.5 | 2.2 | 3.1 |
- EU | 3.6 | 1.7 | 1.1 | 0.9 |
Developing Economies | 5.7 | 2.1 | 3.2 | 3.8 |
Transition Economies (East Europe) | 7.4 | 3.5 | 5.7 | 6.0 |
Source: Various UN agencies, IMF and the World Bank
Developed Countries - Despite the drivers of a low interest rate (and also high government spending), economic activity in the developed world remained somewhat sluggish in 2003 and has not shown any great signs of revival in 2004 either. The developed world is now divided into three distinct parts, viz. USA, EU and Japan. Out of these, the former two have shown some signs of growth, but EU has remained sluggish.
USA - Since the setback of the IT bubble burst in 2000, impetus for growth has come from consumer/household spending. Corporate investment has begun to pick up only recently despite the prevalent low interest rates. However, employment has not picked up, which is not a good omen for further growth in consumer spending. The unemployment rate has remained constant at 5.9% during both 2002 and 2003, and job losses in manufacturing continue - which is one impact of globalization, where USA is losing manufacturing activity to the emerging economies. More concerning are the US fiscal and trade deficits. The US current account deficit currently stands at 5.2% of GDP. Meanwhile, capital flows into USA too have declined and this is reflected in a weak dollar. The US fiscal deficit is now 4.5% of GDP and shows no sign of reduction.
Japan - Japan has remained in a low growth situation for almost a decade now, with growth averaging at 1.2% per annum. In 2004, there are indications that the situation might be improving. This is reflected in the surge in the stock market and greater business confidence. However, doubts have been expressed if Japan can sustain high growth in the near future, or the 4% average growth rate it achieved in the eighties.
EU - The EU is the most struggling region in the developed world. Unemployment remains high in all the major EU economies except UK. EU's current problems have been increased by an overvalued exchange rate which has considerably reduced its export potential. The rate of corporate investment has remained low in the last five years, and productivity has not increased either.
Developing Countries - Growth in the developing countries was less than the global average, growing by about 0.5 percentage points. Within the developing world, the Asian economies are the ones with the strongest performance, which are currently the fastest growing economies in the world. Their growth is mostly based on spurt in manufacturing activity and supported by increase in trade. Manufacturing activity has been shifting out of the developed to the developing world for a long period now on grounds of lower costs, which has fuelled growth in these economies. It is now extending to some service industries as well for the same reason.
The role of China - China now plays a pre-eminent role in the developing countries, which is really quite unique in the world, as it has become a major global manufacturing hub, even though China's share in global exports is still only 5%. It enjoys this pre-eminence because of good infrastructure, investor friendly policies, a large domestic market and a low-cost but productive labour force. Earlier, manufacturing was mostly in the local factories of the developed world, which China has replaced.
Trade - World trade has somewhat slowed down, though it has recovered from the negative rate posted in 2001. Trade is growing more strongly in the developing than the developed world, whose growth is fueling greater import demand - at the same time their GDP growth to a great extent relies on their exports. In 2002 world trade grew by a modest 3%, a level which was more or less maintained in 2003. The good performance of the developing countries owes much to their strong trading performance, which seems to be a sustained and continuing trend.
World Trade
Increase in Global Trade Volume | |
Average 1991-2000 | 7.3% |
1998-99 | 5.8% |
1999-00 | 13.3% |
2000-01 | -0.6% |
2001-02 | 3.3% |
2002-03* | 2.9% |
Source: IMF. *IMF estimate.
Commodity Markets - Non-oil prices recovered after more than a decade of decline. Since 1995, non-oil commodities prices had declined by an average of 20%, among which agricultural raw materials suffered the most. The recovery in 2003 was across the board for all commodities, the sharpest of which was for metals.
Financial Markets - The role of the financial markets in the global economy is critical as they reflect the mood of the investors. This role assumes even more importance and careful watching as these markets are prone to overreaction and excessive swings, which can adversely affect the real economy. However, in recent years, the global financial market has shown considerable stability in face of several adverse developments in the real economy. Most major stock markets of the world rose in 2003, which is a sign of confidence of savers and investors in the future, and an indication of the belief that interest rates are not likely to fall any further.
Inflation - Though inflation showed first signs of returning in 2004, the inflationary pressures are still very mild - at least they were till end 2003. Because of rise in commodity prices, particularly oil prices, inflationary pressures may have strengthened since then. Nevertheless, monetary authorities continue to maintain low interest rates. The outlook for 2004 still remains positive in terms of consumer confidence and performance of the stock markets.
Outlook - The rapid rate of globalization has led to a shifting of manufacturing activity from the developed to the developing world. Such competition has challenged the economies of the developed world, and its immediate impact is of course that they are no longer growing at the strong rates they were during the period from the fifties to the eighties. The challenge for the developing world now is even stronger to sustain the accustomed rates of growth - probably not possible anymore. It is a positive development insofar it bridges the gap between the developed and developing world. On the other hand it does raise the dangerous prospect of protectionist policies in the developed world.
Immediate growth prospect are currently the highest in the oil exporting economies for the obvious reasons of high oil prices. In the rest of the world, the best growth prospects are in the East Asia (China) & South East Asia countries (ASEAN countries), which have become major centers of manufacturing. Next are the economies of south Asia (India mostly), increasingly becoming the hub of global services like IT, call centers etc. Their growth has even enabled them to take the high oil prices in 2004 in their stride. Meanwhile any major recovery in the US economy would be beneficent for the entire global economy, but particularly for the emerging economies, as the US still accounts for 20% of the exports of these countries.
© Emirates Industrial Bank 2004
