International Economic Outlook: The World Economy in 2009

I. The Long-Term Global Outlook The baseline long-term forecast for the world through 2009 points to continuation of growth with a risk of a global slowdown in the fourth year of the first decade in the century. The world's output is expected to grow at an average annual rate of 3.4% during the forecast period, 2000-09, which is close to the longterm trend rate of global output and above our projection published last year. The upward change in the projected overall growth in the world reflects a technology driven strengthening of growth in the developing countries, particularly in Latin America and in the countries in transition. The new economy growth and its positive effects on productivity, wages and inflation will follow a global life cycle moving to the developing world during this decade. Consequently, the longterm outlook is for greater convergence in both economic growth and, especially, in inflation across regions and economic areas, which are at different levels of development. The long-term projections of the baseline forecast for selected global economic, business, and financial key indicators to the year 2009 are presented in Tables 4 and 5. The countries are classified according to the International Monetary Fund' guidelines. The newly industrialized Asian of Hong Kong, Korea, Singapore and Taiwan, as well as Israel are now considered together with the group of countries traditionally known as industrial countries. The expanded group is labeled the economies in recognition of the declining share of employment in manufacturing, common to all of these economies. The long-term scenario is based on the following developments regarding policies as well as trends in structural and supply factors in the global economy: Fiscal Policy. Consolidation of fiscal policy in the United States and in Europe is expected to continue over the forecast horizon. In the nineties, political pressures in the United States for a balanced budget, combined with the requirement of convergence to low debt-income and deficit-income ratios for monetary unification in Europe, resulted in growth rates of government expenditures below those of potential output in the major industrial countries. As taxes rose in line with income growth driven by employment and productivity gains, government deficits as a percent of GDP declined substantially and changed to surpluses in many cases. Compared to 1994, the 1999 government budgets as a percent of GDP changed as follows in the major industrial countries: In the United States, from a deficit of 3.8% to a surplus of 0.7%; in Germany, from a -2.5% deficit to a -1.5% deficit; in France, from a -5.5% deficit to a -1.85% deficit; in Italy, from a -9.1 % deficit to a 1.9% deficit; in the United Kingdom, from -6.8% deficit to a 1.6% surplus; and in Canada from a -6.7% deficit to 2.2% surplus. To stimulate domestic demand, expansionary fiscal policy in Japan resulted in increased deficits and a level of national debt above 125% of the national income. The Japanese deficit-income ratio registered -7.4% in 1999 and is estimated to be around -8.2% this year, compared with -2.3% in 1994. It is expected that the progress of the Japanese recovery will result in a fiscal restraint over the long-term. Fiscal restraint has also contributed significantly to the decelerating-inflation economic growth of the developing countries in the nineties. The deficit-income ratio for the group of the developing countries increased from -2.9% in 1996 to -5.2% in 1999 because of their economic slowdown during that period. In our forecast, we expect the overall deficit-- income ratio for the developing countries to return to the early nineties levels of about -3% over the next three years and then continue its decline stabilizing around - % by the year 2009. The implications of this fiscal mix in the advanced and in the developing world are expected to enhance financial stability and sustain economic growth in the global economy. …

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