2001 Global Economic Outlook.

Last year's blistering growth in the United States pulled much of the world along with it, but in 2001, the rest of the world will not return the favor. Low inflation and moderate growth in every region of the world will offer little stimulus to the U.S. economy. The Economist's poll of forecasters projected growth in the U.S. to fall by nearly 40.0 percent from 5.2 percent at the end of 2000 to about 3.0 percent for 2001, still outpacing growth in most industrialized countries and the Euro-11 as a group. However, this may prove overly optimistic. Most economists are lowering Gross Domestic Product (GDP) growth estimates as both consumer confidence and the National Association of Purchasing Management's index of manufacturing fell in December 2000. At the same time, corporate debt defaults reached their highest level in decades, and credit markets tightened as the spread between junk bonds and Treasuries widened to the highest level since the recession of 1990-1991. In the U.S., recession, rather than inflat ion, is the greatest concern, and Alan Greenspan, Chairman of the Federal Reserve, took quick action in early January 2001 to lower both the federal funds rate and the discount rate. Even with more interest rate cuts on the horizon, it remains an open question whether a soft landing can be achieved and a return to moderate growth can be attained.

With the U.S. economy slowing, will the world follow? In general, no; but the economies of major U.S. trade partners certainly will. Exports to the U.S. account for well over a quarter of GDP in Canada and Mexico, and a slowdown in the U.S. will certainly cause a slowdown in those countries. Similarly, domestic growth will slow in Southeast Asian countries (Malaysia, Korea, and Taiwan in particular) that direct a large share of their domestic production to U.S. markets. Europe and Japan will feel little effect since trade with the U.S. is a smaller portion of their domestic production, in the 2.0-3.0 percent range. In Europe, planned tax cuts will provide some stimulus, and if the U.S. demand for oil and raw materials falls, a price decline in these world markets will benefit manufacturers in Europe and Japan.

According to The Economist's poll of forecasters, growth in income for the Euro-11 (Austria, Belgium, Britain, Denmark, France, Germany, Italy, Netherlands, Spain, Sweden, and Switzerland) is expected to be strong, ranging from a low of about 2.3 percent for Denmark to a high of 3.6 percent for Sweden. In Europe, unemployment is typically double that of the U.S., currently 8.8 percent for the Euro-11 vs. 4.0 percent for the U.S. GDP growth will bring down unemployment in the Euro- 11 only slightly, while the U.S. rate is expected to climb a bit in 2001. In Eastern and Central Europe, progress continues in the transition to a market economy. Poland, Hungary, and the Czech Republic continue to lead the smaller economies, with GDP growth at or slightly above 5.0 percent for Hungary and Poland and somewhat less for the Czech Republic. Inflation remains modest; I expect it to be about 10.0 percent for Hungary, slightly less for Poland, and about 4.0 percent for the Czech Republic. Russian institutional transition seems back on track, and the economy is recovering with the election of Vladimir Putin as president and, equally important, the increase in world oil prices. GDP growth reached 8.0 percent by year-end 2000 and is expected to remain strong in 2001. Inflation continues to be persistently high, at about 20.0 percent last year and probably the same next year, as Russian Central Bank president Gerashenko still does not understand the connection between money growth and increases in the price level.

While Europe may prove to be the anchor for growth in the world economy in 2001, Japan faces continuing homegrown problems. Last year at this time the Japanese Central Bank lowered interest rates and the government initiated a large stimulative fiscal package. Growth resumed and had reached 2.0 percent annually by mid-2000. In August 2000, the Central Bank ill-advisedly raised interest rates, slowing everything down. Consumer prices continue to fall, retail sales continue to fall, and GDP growth has slowed. Even though exports to the U.S. are a small share of domestic production, a slowdown in the U.S. that spills over to a few other Southeast Asian countries may be the straw that breaks the camel's back, tipping Japan into a recession as well. For the rest of Asia (China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand), the recovery from the financial crises of the late 1990s is nearing completion. Strong growth last year, ranging from a low of 4.8 percent i n the Philippines to 10.4 percent in Hong Kong and Singapore, is expected to continue in 2001, but with a potential slowdown in those countries also dependent upon the U.S. export market. Consumer price inflation was 6.0 percent or less last year everywhere except in Indonesia, which hit 9.4 percent. With no additional increases in oil prices expected and sound monetary policies in place, inflation is expected to remain under control in 2001, too.

In South America, growth prospects are mixed. Mexico will likely finish 2000 with GDP growth around 7.0 percent, but the country faces a potential slowdown in its biggest export market. Similarly Brazil, Chile, and Columbia had strong growth last year and will likely continue the trend next year since their economy is less dependent upon the U.S. Income growth in Argentina and Peru will likely end 2000 in the black, but not more than 1.0 percent for the year. Inflation is less than 10.0 percent for all of the countries in the region except for Venezuela where CPI growth remained just over 14.0 percent for the year.

The U.S. economy accounts for nearly a third of global output. Therefore, for 2001, the U.S. economy remains the wildcard in the global outlook. Every major economy faces a relatively optimistic growth scenario with the exception of the U.S. and Japan. While the U.S. economy may land softly, Japan, still the second largest economy in the world, has yet to take off. Only those countries closely tied to the U.S. via exports face a potential slowdown. Even if President Bush's massive tax cuts do make it through Congress, they will have no impact on income growth in 2001. Thus, as has been the case for the entire decade of the 1990s, next year's fortunes depend upon the skills of Alan Greenspan. Let's hope he has not lost his magic.

David M. Kemme currently holds the William N. Morris Chair of Excellence in International Economics at The University of Memphis. He served as Director of the International M.B.A. program (1994-1997) and Chair of the Economics Department (1997). Prior to joining The University of Memphis, he was a W. Frank Barton Faculty Fellow at Wichita State University (1991-1994) and Pew Charitable Trusts Scholar-in-Residence at the Institute for East-West Studies, New York (1989-1991) where he directed the Economics and Security Program. In 1991, he was also a Distinguished Fellow at the Mitsui Research Institute in Tokyo. He earned a B.A. in mathematics from Miami University and an M.A. and Ph.D. in economics from The Ohio State University. He was a Fulbright Lecturer at the Main School of Planning and Statistics in Warsaw (1981-1982). He has researched and published more than sixty articles on the economics of transition in the former Soviet Union and Eastern Europe, productivity and efficiency in Eastern Europe and t he Soviet Union, disequilibrium macroeconomics, and the chronic shortage model of centrally planned economics. Dr. Kemme has published in such scholarly journals as Soviet Studies, Journal of Comparative Economics, Southern Economic Journal, Economic Systems, Post Soviet Economics and Geography, and other journals such as International Economic Insights and International Business. He is author of Economic Transition in Eastern Europe and the Soviet Union: Issues and Strategies and has edited or co-edited four other books. Dr. Kemme is North American Editor of Economics of Planning and is on the Editorial Board of the Atlantic Economic Journal and Russian and East European Foreign Trade. He has served as a consultant to numerous organizations and corporations including Shell Oil, the International Bank for Reconstruction and Development, the Rand Corporation, and the United Nations Food and Agriculture Organization. He has made numerous appearances in both local and national news media including CNN, FNN, and CNBC and is regularly quoted in leading national newspapers such as the New York Times, the New York Post, the Washington Post and the Wall Street Journal. Dr. Kemme also co-directed a collaborative USIA project to develop a business school at Comenius University in Bratislava, Slovakia, in 1992-93.