Economic recovery after the 1997-98 slowdown turned out to be much stronger than anticipated. During 1999, world economic and financial conditions improved significantly, with growth picking up in almost all regions of the world. World economic activity rose from 2.5 per cent in 1998 to 3.3 per cent in 1999, a sharp upward revision from the initial projection of only 2.2 per cent. The remarkable rebound is the result of policy adjustments implemented in the major industrial countries and the strong stabilisation and reform efforts in a number of emerging market economies around the world. The strength of the US economy made a major contribution to the rebound in the global economy. However, there are major concerns about, first, the continuing increase in external imbalances, with the record deficit of the US current account and the persistently large surpluses in Japan and to a lesser extent in the euro area; second, the marked misalignments of several key currencies and third, the very high stock market valuations around the world especially in the technology and information sectors. It is to be noted that the recovery in world economic activity has been accompanied by a more than doubling of oil prices since early 1999, mainly due to production curbs by oil producers. The projection of world growth for 2000 has been raised to 4.2 per cent; it may attain an even higher level given the continued strong performance in the United States and the possibility of a more robust recovery in Europe.

Output of major industrial countries increased from 2.5 per cent in 1998 to 2.8 per cent in 1999 and is expected to further rise to 3.3 per cent in 2000. In the US, the combination of strong investment and productivity growth, subdued wage pressures and ongoing low inflation as a result of fundamental changes in the economy have raised its potential growth rate. However, much concern remains about the rising internal and external imbalances that have accompanied the prolonged expansion of the economy. After registering a rate of growth of 4.3 per cent in 1998 and 4.2 per cent in 1999, the US economy is expected to grow by 4.4 per cent in 2000. After a long convalescence in Japan, there now seems to be a somewhat improved prospect of a moderate but self-sustaining recovery in private sector demand. Structural reform is essential for a lasting recovery in Japan. It is of special importance that the Japanese authorities provide a supportive environment for financial and corporate restructuring and encourage labour mobility. Growth remained quite strong in France, and recovery is also now under way in Italy and Germany. After slowing down in late 1998, economic activity in the United Kingdom picked up significantly in 1999, with buoyant private consumption supported by increasing asset prices and strong employment growth. Economic activity is expected to gather momentum in 2000. A more balanced pattern of growth will be achieved among the major industrial countries through a sustained pickup in domestic demand in Western Europe and Japan, together with some slowing of growth in the United States.

Growth of output in the euro area declined from 2.8 per cent in 1998 to 2.3 per cent in 1999 but is expected to pick up to 3.2 per cent in 2000. This is significantly higher than earlier projections. On the domestic side, this optimistic outlook reflects expectations that ongoing employment growth and higher rates of capacity utilisation will benefit the growth in domestic demand. On the external side, higher-than-expected growth of the world economy suggests that the growth of exports in the euro area should continue to be strong. However, the pace of activity in the larger euro area economies continues to differ significantly from the much more rapid expansion in the smaller countries, in particular, Ireland, Spain, Portugal and Finland. Growth in these countries has generally been associated with rapid increases in asset prices, particularly of property. On the fiscal front, an extensive program of reforms is required in most economies in the euro area so as to reduce current and longer term expenditure pressures and provide much more scope for tax relief. Also, complementary structural adjustment measures, especially in labour and product markets, are needed for sustained non-inflationary growth in the euro area.

Since mid-1999, the financial and economic outlook in the emerging market economies has continued to improve. Exchange rate misalignments have been corrected and equity prices have risen significantly. In Latin America, the recessions have, in general, been short-lived and in Brazil, shallower than had been expected. There have also been remarkable turnarounds in Asia in the course of 1999, especially in Korea which recorded a growth rate of nearly 11 per cent, and other economies also showing recoveries. The improvement in macroeconomic and financial conditions in Latin America and East Asia is the result of sound macroeconomic policy implementation as well as the adoption of strong structural reform measures. Rising exports have played a key role in the rapid recovery of the crisis-affected countries, adding to the support provided by public spending and more recently by private domestic demand. However, the rapid momentum of the recovery will require some moderation in stimulative fiscal and monetary policies and additional progress in banking and corporate sector restructuring.

In the developing countries, as a group, growth of output increased from 3.2 per cent in 1998 to 3.8 per cent in 1999 and is expected to rise significantly to 5.4 per cent in 2000. As a result of higher international oil prices, the economic prospects of most countries in the Middle East and several of the larger economies in Africa have improved substantially. The rapid increase in oil prices has contributed, to a large extent, to reducing fiscal and current account imbalances in oil-producing countries and brought about a general strengthening of domestic confidence, asset prices and demand. As regards the African economies, economic prospects have improved through progress achieved with macroeconomic stabilisation, structural adjustment and political reforms. Among the largest economies in Asia, China and India performed strongly in 1999 and are expected to maintain strong growth in 2000.

After widespread slowing down of output in the wake of the Russian crisis, growth in the transition economies, in general, improved in 1999 and is projected to further strengthen in 2000. Thus, following a contraction of 0.7 per cent in output in 1998, transition economies, as a group, grew by 2.4 per cent in 1999 and are expected to grow by 2.6 per cent in 2000. However, economic performance and prospects differ widely among these countries depending on the degree of stabilisation and restructuring. Output in Russia contracted by 4.5 per cent in 1998. However, it grew by 3.2 per cent in 1999 and is expected to grow by 1.5 per cent in 2000. There has been a rapid turnaround in Russia’s economic performance in 1999 but the prospects for a sustained recovery remain uncertain because these improvements have been built on a narrow and not necessarily sustainable base including higher prices of energy exports. The oil price rise has contributed to significant improvements in Russia’s external balance and fiscal position.

Inflation in the advanced economies, as measured by consumer prices, declined from 1.5 per cent in 1998 to 1.4 per cent in 1999 but is expected to rise to 1.9 per cent in 2000. Inflation in the major industrial countries increased from 1.3 per cent in 1998 to 1.5 per cent in 1999 and is expected to reach 1.8 per cent in 2000. In the US, the inflation rate rose from 1.6 per cent in 1998 to 2.2 per cent in 1999 and is projected to increase further to 2.5 per cent in 2000. As a pre-emptive measure against inflation, the US Federal Reserve raised interest rates five times during 1999-00, from 5.0 per cent to 6.5 per cent. After registering an inflation rate of 1.2 per cent in 1998 and 1999, the inflation rate in the euro area is expected to increase to 1.7 per cent in 2000. The rise in oil prices in May 2000 increased the upward pressures on price stability in the euro area. On fears over inflation, the European Central Bank increased its interest rates five times during 1999-00, from 3.0 per cent to 4.25 per cent. Inflation in the UK fell from 2.7 per cent in 1998 to 2.3 per cent in 1999 and is expected to decline further to 2.0 per cent in 2000.

The movements of the main currencies during the year under review were influenced by cyclical factors and associated expectations of monetary policy adjustments in the United States, Japan and the euro area as well as portfolio and foreign direct investment flows. During the second half of 1999, the yen appreciated markedly against the US dollar and the euro. The euro continued to be extremely weak, trading at below parity with the US dollar largely due to the continuing differences in cyclical conditions between the euro area and the US and to capital flows from the euro zone to the US. The exchange rate of the euro may also have been influenced by the lagging structural adjustments in continental Europe.

World trade in goods and services rose from 4.2 per cent in 1998 to 4.6 per cent in 1999 and is expected to increase substantially to 7.9 per cent in 2000. After registering a growth rate of 3.7 per cent in 1998, the volume of exports of advanced economies grew by 4.4 per cent in 1999 and is expected to rise significantly to 7.2 per cent in 2000. Developing countries witnessed a slowdown in the expansion of their volume of exports, from 4.5 per cent in 1998 to 1.7 per cent in 1999. However, it is projected to pick up substantially to 9.7 per cent in 2000.

Current account imbalances in the major industrial countries remains a cause of concern. The current account deficit in the United States rose from 2.5 per cent of GDP in 1998 to 3.7 per cent in 1999 and is projected to increase further to 4.3 per cent in 2000. The discrepancy between the growth of demand and supply in the US has been reflected in a sharp widening of the external deficit. A more balanced pattern of global growth would make an important contribution in reducing the US external deficit. As a percentage of GDP, UK’s current account deficit also deteriorated, from 0.1 per cent in 1998 to 1.4 per cent in 1999 and is expected to reach 1.5 per cent in 2000. There has been a significant pickup in economic activity in the UK in 1999. GDP rose by 2 per cent, with buoyant private consumption supported by rising asset prices and robust growth in employment. In contrast, the current account surplus in Japan declined from 3.2 per cent of GDP in 1998 to 2.5 per cent in 1999; it is projected to further decline to 2.2 per cent of GDP in 2000.

Total external debt of developing countries maintained its upward trend; it rose from US$2,007 billion in 1998 to US$2,038 billion in 1999 and is expected to rise further to US$2,065 billion in 2000. The ratio of external debt to exports of goods and services of developing countries declined from 173 per cent in 1998 to 163 per cent in 1999 and is projected to further fall to 146 per cent in 2000. However, despite some improvement in the debt profile for some countries since the debt crisis in the 1980’s, the picture is bleak for many low-income countries. Even after the provision of large-scale and persistent financial assistance by official donors, about 40 of the poorest developing countries, the Heavily Indebted Poor Countries, still have unsustainable debt burdens.