OVERVIEW

The world economy exhibited several welcome developments in 1999. The United States of America managed to sustain a remarkable growth momentum, robust consumer demand and a tight labour market did not undermine domestic price stability, and the stock market avoided any major correction despite recent volatility. These positive developments in the United States coincided with the budding economic recovery in Japan, the maintenance of reasonably healthy growth in a large part of Asia, and positive trends in production and employment in several of the Asian economies hit by the crisis underpinned by falling interest rates, fiscal stimulus, higher export earnings and reserves, and improved investor and market confidence. All these developments combined to raise global growth estimates by almost one percentage point in real terms during the second half of 1999, compared to forecasts made at the beginning of 1999. The improvement in global economic performance and outlook expected for the year 2000 provides a sharp contrast to the relatively bleak prospects of the world economy as perceived by many at the beginning of 1999.

However, the relatively brighter picture envisaged for the year 2000 will have to be tempered by a number of possible downside risks. Most notable among them is the sustainability of the exceptionally strong growth in the United States economy and of the economic recovery in Japan. The upturn in oil and, to a lesser extent, commodity prices should give a boost to a large number of developing countries, but it may also induce some monetary tightening to contain the risk of inflation, constraining global and regional economic expansion in the process. Cross-border capital flows remain highly risk-averse with considerable interest spreads and volatility, notwithstanding the easier financial conditions worldwide. Among other concerns are the large and rising private dissavings, the potential of a drastic correction in the stock markets in the United States and the slow pace of restructuring in labour and product markets in several European Union (EU) members. At the same time, developing countries will have to make substantial progress in implementing a variety of structural reforms, including in the financial and corporate sectors. There is also the need for human and institutional capacity-building, as well as for better social security and social protection for all.

The year 1999 marked another year of robust economic performance by the United States, with unemployment at a record low and remarkable price stability. EU displayed signs of a gradual improvement in output from the latter part of the year. Inflation continued to remain at very low levels and unemployment also began to decline gradually in EU last year. On the back of a succession of large fiscal stimuli, the Japanese economy exhibited encouraging indications of revival in the latter part of 1999, after five quarters of negative growth. The global stock markets continued to suffer from periodic bouts of volatility in investor sentiment, but did not suffer any major upset in 1999 as a whole. Indeed, many markets showed respectable gains during the year, with the Japanese stock market being especially buoyant.¹

The Asian crisis and its reverberations continued to be the primary focus of attention in both official and academic circles during much of 1999. Nevertheless, there was growing evidence that economic recovery among the crisis-hit countries had entered a more positive phase from the first or second quarter of 1999; several of them had experienced a deep contraction in output and employment during 1998. The extent and pace of restructuring in the financial and corporate sectors would exert an important influence over the patterns of economic growth and diversification in East and South-East Asia in the near to medium term. Gross domestic product continued to expand at or near its recent trends in most other Asian developing countries.

Reflecting in part these positive developments, world trade showed a small increase in value terms in the first half of 1999, compared to the same period of the previous year. Rising oil prices and greater firmness in a number of commodity prices provided a further impetus to the nominal gains in world trade during the second half of 1999. Remarkable stability in producer and consumer prices, by and large, prevailed in the world economy during 1999, except notably in Central Asia and the Russian Federation. Inflationary pressures had been subdued since the early 1990s. Given the strong policy stance to preserve price stability, particularly among developed countries, the outlook for a continuation of this global trend remained favourable for the coming year.

The return of financial stability and improved growth prospects were accompanied by signs of a modest recovery in capital flows to the developing countries, including those in the Asian and Pacific region during 1999. The earlier fears of a generalized credit crunch in the wake of the financial crisis in the Russian Federation proved unfounded. Nevertheless, the gross volume of such inflows (totalling $103.6 billion up to August 1999) would only be marginally higher than the previous year's level of $148.5 billion, which represented a precipitate decline from the pre-crisis inflow to all emerging markets, averaging $252.2 billion a year in 1996-1997.

Against these favourable developments, however, the major economies of Latin America weakened perceptibly and slipped into recession, in part the result of financial market turmoil that had hit them in late 1998 and early 1999. The Central Asian economies showed only fitful progress in dealing with longstanding structural and financial sector problems; they continued to suffer from constrained access to foreign capital markets. The economy of the Russian Federation rebounded with surprising vigour after the turmoil of 1998 but with few signs of a breakthrough on the domestic fiscal front or in the renewal of foreign investor confidence. In Africa and West Asia, economic performance and prospects remained mixed. As in previous years, political problems and military conflicts had posed a major impediment to sustained restructuring and durable economic progress in a number of developing countries in Africa.

This chapter reviews the broad macroeconomic trends in the developed and developing economies in 1999. An assessment will also be made of the implications of the trends in global trade and financial flows for the ESCAP region.

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Footnotes:

¹ The Nikkei 225 stood 39.6 per cent higher in United States dollar terms on 3 November 1999 than its level on 31 December 1998.