2003 may be remembered as the year the global economy turned a corner. After three years of stagnation -- following the expansion of the 1990s -- the world economy this year started showing signs of life. Asia -- especially China -- boomed, and toward the end of the year, the U.S. looked finally ready to start its long-awaited recovery. Forecasters are also revising upward predictions for Europe. The greatest risks -- aside from unforeseen terrorist attacks or oil shocks -- are the rising U.S. budget and trade deficits.
Prague, 11 December 2003 (RFE/RL) -- Economists say 2004 may see a return to global economic growth. They say a promising mix of an expanding U.S. economy, a robust China, low interest rates, and stable energy prices should combine to give the world economy its first year of strong growth since the end of the 1990s boom.
The optimistic forecast follows a mainly mixed year in 2003. Europe was mostly stagnant, but the U.S. economy -- the world's biggest -- showed strong signs of life toward the end of the year.
Vincent Koen is a senior economist at the Paris-based Organization for Economic Cooperation and Development (OECD). His organization recently raised its global growth predictions for next year.
"The U.S. economy has shown a strong rebound. The Japanese economy has surprised us and everybody else with a very robust performance in the second and third quarters of this year. And now with a lag, the euro area now seems to emerge from its three-year stagnation. So for 2004, things look quite bright," Koen said.
In the U.S., the economy expanded a phenomenal 8 percent in the third quarter of the year -- the latest statistics available.
Koen says the U.S. economy is responding to the administration's aggressive stimulus package that includes tax cuts and historically low interest rates. In addition, a record budget deficit and the decline of the dollar -- which helps U.S. exports -- is fueling growth.
"In the U.S., the recovery is really a 'policy-stimulus' story, with the extremely aggressive monetary and fiscal policy, plus exchange rate depreciation. So there's been, from all sides, a lot of stimulus pumped into that economy. It's an illustration of how effective such proactive policies can be, but also a little bit of a worry because of the now unsustainable fiscal imbalance," Koen said.
One of the year's surprises was Japan, which had been mired in recession. At the start of the year, the country was synonymous with "deflation" -- a crippling form of recession characterized by falling prices and wages. By the end of the year, Japan was being hailed as Asia's newest economic "tiger."
Koen says credit for Japan's revival goes to China. The Chinese economy grew some 8.5 percent in 2003 -- despite the severe acute respiratory syndrome (SARS) epidemic early in the year. Growth was fueled by a boom in foreign investment and expanded output in the manufacturing sector, especially automobiles. The economy is expected to grow around 7 percent in 2004.
"Growth has been helped a lot in Asia by the dynamism of China .. and that's both a cause for rejoicing and concern going forward, to the extent that the Chinese economy may be overheating. Japan's surprise stems very much from its rapid export increases to China," Koen said.
In the European Union, the outlook for 2004 is more modest, but there are reasons for optimism. EU surveys taken at the end of the year show a rise in business confidence. Plus, Koen says, interest rates in the euro area are low by historical standards.
In the former communist countries, growth should continue to outpace the rest of Europe. In Eastern Europe, higher exports to the EU -- in step with the gathering recovery there -- are expected to combine with continued strong domestic spending to keep the economy moving.
Nick Redman of the London-based Economist Intelligence Unit says countries that export to more dynamic parts of the EU -- such as the Nordic countries -- will see higher growth.
"Within Central and Eastern Europe, it's going to depend on the extent to which economies are trading with different parts of the [European Union]. If you look at France and Germany, they are going to be recovering at a slower rate than, say, the Nordic countries. So the Baltic economies, for instance, have more trade with the Nordics, and you're going to see them -- again in 2004 -- posting fairly impressive growth rates," Redman said.
For energy exporters like Russia and Central Asia, growth will be buoyed by relatively high oil and gas prices -- although prices could soften in 2004 if Iraqi oil re-enters the market in quantity.
"For the [Commonwealth of Independent States], the crucial question is oil prices," Redman says. "If oil prices remain quite high, then we are going to see strong growth in the CIS. However, I think it's safe to assume that when Iraqi oil returns to the market in 2004, you are going to see a softening of oil prices a bit and this will undercut CIS growth rates."
Several risks lie behind the forecasts. In addition to the possibility of an oil shock or terrorist attack, the twin U.S. budget and trade deficits are potentially the most serious.
The Iraq and Afghan wars, the fight against terrorism and tax cuts have combined to give the U.S. its biggest budget deficit in history. Meantime, the U.S. is importing far more than it exports -- a legacy of years of a relatively strong dollar.
Concern now is that these deficits could spark a run on the dollar, causing the currency to plummet. This, in turn, could ignite fears of inflation and cause the U.S. central bank, the Federal Reserve, to raise interest rates. Any rapid rise in rates could kill a recovery.
The OECD's Koen says, "One concern we have is how the fiscal and current account imbalances will unwind in the U.S. If the dollar were to drop abruptly, we could see long-term interest rates shoot up, and that would be not only bad for the U.S. recovery but also spill over worldwide and stifle the nascent European recovery."
A longer-term threat to growth could be a return to trade protectionism. This past year saw the collapse of efforts to lower tariffs at trade talks in Mexico.
"Per se, there's nothing dramatic happening [in trade] yet," Koen says. "There's always the risk that for a variety of reasons, protectionist interests would start to prevail and that could [start] a vicious circle of retaliation and that could be really vicious indeed. For the moment, it's just one of several risks. It's not an imminent concern."
The U.S. sent a positive signal this month by agreeing to abandon tariffs on imported steel. The EU had threatened to impose restrictions on billions of dollars in U.S. exports in retaliation.