In September, the International Monetary Fund (IMF) published its World Economic Outlook (WEO), which assesses the current state of world economy and the prospects for economic growth in the coming year.  According to the IMF document, the world economy is enjoying the strongest growth in more than a decade this year.  Despite recent oil price increases, which have led to significant price pressures in most countries, inflation remains well contained in the world economy.

Strong growth is being recorded in virtually all of the world's major regions, led by the U.S. economy, which has been experiencing particularly rapid advances in productivity.  As a result, real output growth has been strong and inflation well contained.  Growth in the European Union, particularly the Euro Area, strengthened further this year and Japan appears to be on a path to recovery.  Additionally, non-Japan Asia came back strongly from the 1997-98 crisis last year and is registering even stronger growth this year, while eastern Europe is delivering its strongest growth performance since the start of the transition, led by the rapid recovery of the Russian economy from the severe crisis of the autumn of 1998.

The central scenario of the IMF’s forecast assumes an extremely soft landing in the United States, where growth is expected to drop from 5.2% this year to 3.2% in 2001.  However, world economic growth will be sustained at 4.2% next year, according to the IMF, while Latin America is anticipated to expand by 4.3%.  Furthermore, the IMF expects regional growth to pick up by 0.2% to 4.5%. 

It should be noted, that the IMF forecast was completed before the August runup in oil prices and that the outlook bears more risks on the downside than on the upside.  In an alternative scenario, the IMF accounts for the possibility of a harder landing in the United States and its possible impact on the world economy.  The ‘hard landing’ scenario assumes that higher inflationary pressure in the United States leads to a tightening of monetary policy, which would trigger a drop in U.S. stock market prices and produce slower global growth by a transmission mechanism via international capital and goods markets.  According to the IMF, of all regions the negative impact would be felt strongest in Latin America, since the region is the most exposed to a deceleration in U.S. activity, the vagaries of international capital flows and has significant exports of commodities.  As a consequence, regional GDP growth would drop by 0.4% under the ‘hard landing’ scenario to 4.1% in 2001. 

The IMF’s upside risk scenario accounts for the possibility that the accelerated performance in the United States over the latter half of the 1990s --based on more flexible labor markets and new technologies -- could be repeated over the next few years in other regions, particularly in the Euro Area and Japan.  As a consequence market participants would reevaluate the attractiveness of these regions for investment, leading to greater capital inflows and to significant appreciations of the euro and the yen.  Aside from an increase in the demand for imports and an additional boost through higher commodity prices, the impact on Latin America would be limited, due to a greater sensitivity of Latin American economies to U.S. interest rates.  In fact, the IMF maintains the regional outlook for 2001 unchanged, adding only 0.1% to regional growth in 2002 and 2003.

1 Note: Latin America refers to Western Hemisphere, which encloses all countries in South and Central America plus the Caribbean states.  The seven countries surveyed in our forecast account for more than 95% of Western Hemisphere GDP.

2 Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing and includes information available up to 10 September.  For more details please click here.

For five-year forecasts, please click here.