The golbal economy in 2004: an overview.

The global economy heads into 2004 with a great deal of momentum, riding the tailwinds of rising corporate earnings, equity prices, and decreased military tensions. Low interest rates and a subdued inflationary environment have benefited many countries by improving their terms of trade and enhancing capital flows for investment. However, much like in the U.S., job creation across the globe has not grown fast enough to absorb the world's rapidly expanding workforce. In addition, a climate of uncertainty will still prevail as chronic terrorism, volatile energy markets, and divisive trade disputes erode confidence and keep policymakers on the defensive.

For 2004, the global economy's real Gross Domestic Product (GDP) is projected to grow 3.2 percent. This was preceded by 2.4 percent growth in 2003 and 1.9 percent during 2002. Consumer prices are anticipated to decline to an annual rate of 2.0 percent after growing 2.5 percent during 2003. Regionally speaking, eastern European countries are expected to grow 4.5 percent, while western European countries are projected to grow less vigorously at 2.0 percent. North America is expected to grow 4.2 percent, while Latin American countries will boost their growth to 3.7 percent. The Asian-Pacific zone is expected to grow at a 3.1 percent rate. The north African region is projected to grow 4.5 percent, while the sub-Shahran region will grow 5.9 percent. The African continent will experience some of the world's fastest growing economies, Chad, Equatorial Guinea, and Liberia, as well as some of the slowest growing, Zimbabwe, Gabon, and the Central African Republic.

Economic growth between individual countries within these regions, however, will be significantly divergent, primarily based upon their own domestic economic policies and competitiveness. Table 1 provides the 2004 forecast for real GDP and consumer prices for six of the world's largest economies. Also included is the rise in each country's stock market for the year 2003. Table 2 provides a profile of the six economies in terms of their projected current account balances and interest rates.

Japan's economy is gradually improving due to rising corporate earnings, but the outlook remains cloudy with an exploding government deficit and the continuing unraveling of bad bank loans. Deflation remains an obstacle to higher growth, and unemployment remains historically high at slightly above 5.0 percent. The Chinese economy is poised for continued rapid growth at a rate that would double the size of its economy by 2012, and at a rate that many observers believe is potentially destabilizing. Meanwhile, Chinas propensity to import is expected to grow by 40.0 percent, the world's highest gain. Chinas recent entry into the World Trade Organization (WTO) and its manned space flight have catapulted China into the international arena like the prover-bial 500-pound gorilla. However, Chinas mounting trade surpluses coupled with huge foreign reserves will increase the pressure for them to appreciate their currency, which they have been reluctant to do.

The Brazilian economy is forecast to crawl out of recession and return to positive economic growth. After draconian budget cuts and high interest rates, the International Monetary Fund is granting a $20 billion bailout. However, moderate economic growth won't be strong enough to significantly lower the already high 13.0 percent unemployment rate. Mexico is also forecast to creep out of three years of stagnation with a revamped tax code. The value-added tax (VAT) is proposed to be lowered from 15.0 percent to 10.0 percent, while a national sales tax will be implemented (food and medicine exempted), with a majority of the proceeds going to local government. Immigration policy is once again on the agenda for the U.S. and Mexico. However, most observers agree that illegal migration will re main a problem as long as the Mexican economy fails to create enough jobs to stem the tide.

After China, Russia may be the second must interesting economy of 2004. Joining the WTO and integration into the European Economic Union will be at the top of their priorities. However, corporate governance issues, especially in energy markets, and human rights problems in the break-away republic of Chechnya could derail Russia's attempts to thrust itself onto the world stage. Presidential elections in March will go a long way in convincing other countries that Russia is ready to be more fully integrated into the global economy.

On the European side, the emerging markets of eastern Europe will be transitioning to a higher growth trajectory, while the more developed economies of western Europe will experience growth rates well below their potential (see Table 3). Germany will be hamstrung by a large budget deficit and high unemployment, while the British are facing an exploding trade deficit as exports shrink. The French economy is heading down the tax cut path in order to stimulate consumption but still faces nearly double-digit unemployment and a highly political pension reform time bomb. With the euro at an eleven-year high against the U.S. dollar, stimulating exports to spur job growth may prove to be unattainable. The recent financial accounting scandal surrounding Italian food giant Parmalat highlights the growing concerns over corporate governance and, ultimately, trust from foreign investors. Eastern European countries, like the Czech and Hungary, will be facing substantial transformation as exports and foreign investments rebound. The coming year will not be devoid of major vulnerabilities or minor fits and starts. Problems like SARS, mad cow disease, and natural disasters can cost billions of dollars in lost trade and tourism.... Perennial trouble spots, like the Middle East, and deterring the proliferation of "weapons of mass destruction" will keep the level of anxiety on heightened alert.

However, privatization, corporate governance, and labor market reforms will present some difficult problems.

2004 Economic Watch List

The coming year will not be devoid of major vulnerabilities or minor fits and starts. Problems like SARS, mad cow disease, and natural disasters can cost billions of dollars in lost trade and tourism. Even the AIDS epidemic can be considered an ongoing barrier to economic growth in several countries. Perennial trouble spots, like the Middle East, and deterring the proliferation of "weapons of mass destruction" will keep the level of anxiety on heightened alert. However, two major trends are likely to emerge during 2004 as defining trends that could turn around the course of economic growth and severely test the global financial system.

Trade Wars

The collapse of trade talks this summer in Cancun highlights the growing problems with the harmonization and liberalization of world trade. Agricultural subsidies are the main bone of contention between numerous countries, and there is a growing realization that free trade agreements are not, in the final analysis, domestic job creation programs. For most of the developed countries, stemming the flood of outsourcing of jobs overseas could be the single most important domestic economic issue that must be resolved. Emerging immigration policy changes around the globe could also be considered a type of trade war. The new U.S. system for tracking visitors to the U.S. is already facing retaliatory moves by Brazil and other countries.

The recent U.S. experiment with steel tariffs pointed out their internal political difficulties as steel workers cheered, but auto workers booed. Externally, retaliatory threats from steel producing countries and a WTO ruling that the tariffs are illegal will lead to the rescinding of the tariffs. More recently, selective quotas on Chinese textiles and dumping charges by American furniture makers, also aimed at China, are keeping unfair trade practices on the front burner.

Exchange Rate Instability

Looming debt defaults and current account imbalances will challenge global financial markets. Maintaining orderly and efficient currency markets to manage the necessary adjustments will be difficult. So-called "hot" money, seeking the highest returns around the globe, could undermine even the best intentions of a country's domestic policy objectives. Japan has already begun to aggressively intervene to keep the yen from appreciating too rapidly against the U.S. dollar, while the Chinese are reluctant to untie the yuan from the American dollar and let it float, i.e., appreciate due to its large trade surpluses and stockpile of foreign reserves. A defacto devaluation in the yuan, in tandem with the U.S. dollar, has created unfair terms of trade advantages, especially among Chinas Asian trading partners.

Most countries would agree that a strong currency is preferred over a weak currency, but not so strong as to price goods out of the world market nor so weak as to fuel hyper-inflation at home. The extent to which financial markets can efficiently adjust to a currency crisis will, more likely than not, determine if global economic growth can be sustainable on a higher trajectory, especially when one considers that, according to the Organization of Economic and Community Development (OECD), America's trade deficit is the number one source of potential instability in the global economy. Table 1. 2004 Forecast for Selected Large Economies and 2003 Stock Market Performance