The International Environment - May 2000

- This article discusses developments in the world economy since the February 2000 Quarterly Bulletin, as well as the outlook for output and inflation over the next two years. - Forecasts of world economic activity in 1999 have been revised up repeatedly over the past twelve months, and GDP growth for the year as a whole is now estimated to have been around 3.5%. Underlying this, activity was stronger than was earlier forecast in a broad range of countries. - Growth in the United States in the first quarter of 2000 has, again, been above estimates of the trend rate of most forecasters. The euro area saw a period of weaker growth in the first half of 1999 followed by a marked strengthening in the last six months of the year. The recovery has strengthened in many emerging market economies, including a broad range of countries in South East Asia and Latin America. In contrast, while Japan shows some distinctive signs of recovery, the most recent data, for the fourth quarter, indicated a fall in measured output. - Oil and related energy prices continued to rise up to the middle of March, when OPEC member countries agreed to increase production. Evidence of stronger inflationary pressures has been seen in producer input and output prices, and to some extent in export prices. But further along the price chain consumer prices have generally risen by considerably less, although there has been some pick-up in inflation measures in the United States and euro area. - This more muted response to date of consumer prices may have a number of causes, including the reduction in the intensity of oil usage in many of the industrialized economies over the last 20 years or so. But it has also come at the same time as continuing discussion of possible changes in potential output, especially in the United States, reflecting, at least in part, the influence of new technologies. - Since the February 2000 Quarterly Bulletin, official interest rates in the United States and the euro area have been raised by 0.25 and 0.5 percentage points respectively, and are now at 6% and 3.75%. The Bank of Japan has maintained the zero interest rate policy implemented in February 1999. - According to almost all forecasters, the medium-term outlook is for continued strength in the world economy, and most projections for GDP growth have been revised up since the previous Quarterly Bulletin. It is now not untypical to see projections for world GDP growth to rise by somewhat less than 4.5% in 2000 and around 4% in 2001. - Nevertheless, it is also not untypical for forecasts to indicate that the balance of risks around the projection is on the downside, primarily for reasons linked to the possibility of asset markets falling.

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