Business Groups Forecast Global Economic Boom, Job Growth
Institute for International Economics, Conference Board release new report, survey results
WASHINGTON, DC - 04/08/04 - The global economy is projected to experience a boom encompassing virtually all regions in 2004 and 2005, with the US and Chinese economies providing the strongest boost, says the Institute for International Economics (IIE).?
Growth in real global gross domestic product (GDP) of 4.75% projected for 2004 and 4% for 2005, if true, would be the strongest two-year economic growth rates since the early 1980s, said Michael Mussa, president of the Washington, DC-based economic research organization.
The US economy is projected to grow 4.5% in 2004 and 3.5% in 2005 and the Chinese economy 8.5% in 2004 and 7% in 2005, according to the group.
Mussa - former chief economist of the International Monetary Fund and a member of the US Council of Economic Advisers during the Reagan Administration - cautioned, however, that high oil prices and the threat of even higher prices pose some near-term risk to the IIE's optimistic forecast.
According to Mussa, who presented the group's global growth forecast at a recent news briefing at the National Press Club, also warned of key challenges to sustaining rapid growth over the medium term arising from three important global imbalances - first, the imbalance associated with the very low level of world interest rates and its potential to generate asset price anomalies; second, the dire state of the public finances in most industrial countries, especially in view of the rising burdens of providing for rapidly aging populations; and, third, the massive US current account deficit, whose correction requires adjustments in key macroeconomic policies as well as in exchange rates-including the exchange rates of key emerging-market countries.
US current account deficits of 5% of GDP are not sustainable, said Mussa.?
"Hence the US dollar needs to depreciate from its recent peak by roughly 30 percent, of which less than half has already occurred," he said. "To accommodate the required improvement of $250 billion to $300 billion in its external position without overheating, the United States must depress growth of its domestic demand (relative to its output), preferably by reversing much of the fiscal expansion of 2001-04."
The rest of the world, Mussa added, "must correspondingly boost growth of its domestic demand, although to do so will be challenging because monetary policies are already quite easy and most budget deficits are quite high."
As the result of these factors, said Fred Bergsten, an IIE director, policymakers have "little ammunition" - fiscal or monetary - to mount an appropriate response if the economic expansion slows down.
In a recent news release, the IIE said that the US needs to boost employment and bring its current account deficit down - the latter preferably by reversing much of the tax cuts of 2001-2003.
Bush Administration officials have said repeatedly that the tax cuts have stimulated the US economy coming out of the 2001 recession and contributed to a rebound in the following years.
Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow have downplayed concerns about the size of the US current account deficit arguing that as long as the US economy continues to attract foreign investment and the US government refrains from protectionism the deficit and related current account surpluses in other countries are likely to adjust without excessive shocks.
As for China, IIE said the country must cool down its overheating economy and correct its undervalued exchange rate.
"Both for its own sake and to contribute appropriately to necessary global economic adjustments, China needs to appreciate the value of its currency (by 15% to 25%) and then allow greater exchange rate flexibility," the IIE said.
The institute said that other emerging economies, particularly India and Argentina, also are expected to register strong growth in the forecast period.
Economies of the Middle East are projected to expand in 2004 by 4.25% and those in Africa by 4.5%, helped by high prices on oil and other commodities, and then at only a slightly slower pace the following year.
The Japanese economy, which has suffered from stagnation for several years, is projected to expand faster than forecast in previous reports, IIE said. The Institute projects a growth rate for Japan in excess of 3% in 2004 and around 3% in the following year. Mussa called the development "one of the biggest positive surprises of the last few years."
The IIE said it has "good news" even for Europe: a 1.8% expansion rate for the area in 2004 and 2.3% in 2005. Growth in Europe has been sluggish in recent years. That is not much, Mussa said, but still a substantial improvement over the past two years.
The IIE report was released at the same time as the most recent Conference Board survey that found that confidence among US business leaders is stronger than it has been for 20 years.
The quarterly survey confirms the recent official employment data suggesting concerns about a jobless recovery may be waning.
Half the corporate chief executives who responded to the Conference Board survey said they expected employment in their industry to rise, compared with just 12% who predicted a fall - the most optimistic response on jobs since the research group began its analysis survey in 1976.
Overall confidence levels about the economy are the highest since 1983, with more than three quarters of CEOs expecting continued growth over the next six months.
"We were expecting a strong confidence reading given the last two quarters of back-to-back growth but the optimism about hiring is particularly interesting and suggests we may have turned the corner," said Lynn Franco, director of the Conference Board's consumer research center. "They now foresee enough growth that despite productivity gains they will need to hire more bodies."
The bullish results, based on responses from more than 100 members of Conference Board, follow signs of a turnaround in official US employment data, which recently showed the biggest monthly increase for four years.
Last month, an employment outlook survey by Manpower found US employers expect the seasonally adjusted hiring pace from April to June to be stronger than it has been since the first quarter of 2001.
Based on a survey of 16,000 US employers, 28% said they plan to increase hiring activity for the April-to-June period, while 6% expect a decrease in employment opportunities.
When the seasonal variations are removed from the data, the outlook for the second quarter is more positive than it was last quarter and is nearly twice as strong as it was last year at this time.
Earlier in the year, The Business Council, which reflects the mood among large companies, also reported the first signs of a similar pick-up in confidence.
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