Rafael Pampillón. Professor. Instituto de Empresa
26 January 2004
Though global economic predictions for the coming year appear rosy, the author sees some possible clouds on the horizon.
For 2004, forecasts for performance of both the world and the Spanish economies are moderately optimistic: growth rate is expected to surpass last year’s. Such optimism appears justified, since the end of 2003 corresponded to an acceleration of international economic activity. During 2004, recovery of the global economy will be conditioned by the rhythm set by performance and growth in the United States and Asia. The estimated growth of world GDP is over 4 percent, greater than the 3.2 percent estimated for last year. Major players will be the emergent economies of Asia (principally China, India and South Korea), with 5.5 percent growth. Forecast for expansion in east European countries is 1.5 points above last year’s figures, or 4.1 percent. However, the best news is the increase in international trade, with anticipated growth of 5.5 percent, thus bettering 2002 by 50 percent. This scenario, which appears probable at this writing, is not however risk-free.
A significant quickening of growth is expected in the U.S., as a result of monetary and fiscal boosts, and also due to the readjustment already undertaken by companies (which is letting them increase productivity and thus profits). Two twin problems still remain, however: public deficit, which can push up interest rates; and the external deficit, which can depreciate the dollar abruptly. In the medium term, the U.S. must return to budgetary consolidation. Moreover, to ensure recovery, the much-feared “real-estate menace” must disappear. The Economist insists that house prices are overvalued in several developed countries, principally in the United Kingdom and the United States. The London weekly warned some time ago of the bubble in the stock markets; it also correctly stated that the euro was undervalued. Perhaps it is right again. If so, the fall in house prices could endanger the global recovery, since it would generate a “poverty effect” that would wreck consumer confidence.
Throughout the coming year, the EU will continue its slow progress, caused by its public deficits, the negative effects appreciation of the euro is having on exports, and the absence of structural reforms. The uptick in the European economy will entail furthering more sensible public finances, establishing competition promotion policies, making markets more flexible (especially labor), liberalizing air and rail transport as well as the communications and energy sectors, and improving infrastructure to boost the advance of the European Single Market. The Japanese economy is still stalled, with expansion foreseen at under 2 percent.
Effects on Spain
Were these forecasts to be fulfilled and the risks not materialize, Spain would benefit from external conditions which are much more favorable than at present. Of course, this is conditional upon the end of uncertainties generated by terrorist attacks, stabilization of the situation in Iraq, a halt to oil price rises, continued reduction of protectionist commercial pressures and continuing recovery in Latin America. However, for the Spanish economy to increase its growth rate in a sustained manner, greater price stability is needed to improve the competitiveness of Spanish products. Spain’s inflation, which is above the EU average, could be the reason for creation of a greater trade balance deficit (our imports are growing more than our exports). Given the non-existence of an exchange-rate policy in Spain, external balance can only be achieved by correcting inflation.
Estimates by the Instituto de Estudios Económicos indicate that Spanish exports will achieve a growth rate of 6.5 percent in 2004, benefiting from economic expansion in Europe and in the world economy generally. That increase however, will be offset by a 7 percent rise in imports. If we want our exports to grow further and thus improve the external balance, economic growth and employment creation, prices must be stabilized. Can the government do anything throughout 2004 to reduce inflation? The answer is yes. It can boost the current budgetary surplus with a more restrictive fiscal policy to compensate for the excessively expansive nature of its monetary policy.
Rates of growth_____2003(*) (*)_____2004 (* *)
Asia (excl. Japan)____4.7%__________5.5%
Central & Eastern
Source:In-house using data from The Economist and the IMF