The world economy in 2001

An overview

The world economy deteriorated in 2001, particularly in the aftermath of the tragic events of September 11th. Consumer and business confidence weakened everywhere, and global growth declined markedly to 2.4% from the 4.7% recorded in 2000. As the slowdown affected nearly every major region of the world, it was accompanied by a substantial decrease in trade growth, which reached only 1% compared to 12.4% in the previous year. Output dropped from 3.9% to 1.1% in the industrialized countries, from 6.3% to 4.9% in the countries in transition, and from 5.8% to 4% in the developing countries. Global inflation improved slightly, falling to 4.4% from 4.6% in 2000.

Industrial countries

Growth in the advanced economies rose by only 1.1% in 2001, compared to 3.9% in the year before. Inflation remained low at 2.3% as a result of large spare capacity, rising unemployment, and falling domestic demand.

In the United States, the longest economic expansion in the nation's history came to an end, reflecting tight monetary policy and a sharp correction in equity prices. Growth plummeted from 3.5% in 2000 to about 1%, while the inflation rate dropped from 3.4% to 1.9%. Unemployment rose from 4% to 5.8%, reversing its prolonged declining trend, and business investment weakened considerably amid rising uncertainty about future profits. Canada's growth rate also slowed drastically, to 1.4% in 2001 from 4.4% in the previous year, largely reflecting events in its neighboring country.

In Japan, the modest growth recovery of 2.2% registered in 2000 lost momentum. GDP declined by 0.4%, owing to lower consumer confidence and spending, persistent deflation, rising unemployment (5.6% in December 2001), low corporate earnings, and an ailing banking sector. The collapse of global technology markets and falling exports placed renewed pressure on companies' earnings and profits.

Growth in the euro area decelerated to only 1.7% in 2001, compared to 3.4% in 2000. In the United Kingdom, economic activity remained relatively resilient, owing in part to strong domestic demand. After an extended period of economic boom and declining unemployment, growth moderated slightly to 2.3% in 2001. Elsewhere in Europe, output in Austria, Belgium, Denmark, Finland, Sweden, Switzerland, Norway, and the Netherlands slowed to between 0.7 and 1.7%, primarily because of weaker export market conditions. In Australia and New Zealand, economic activity increased moderately, recording 2.3% and 2.6% respectively. Export performance was well sustained in both countries.

Countries in Transition

Aggregate growth in countries in transition moderated to 4.9%, from 6.3% in 2000, mainly due to the deceleration of export demand caused by slower economic activity in the European Union (EU). Inflation dropped to 16%, down from 20.1% in 2000.

Growth in the Russian Federation was relatively strong at 5.8%, but less than the 8.3% registered the year before. The slowdown resulted mainly from a reversal of factors that had previously boosted growth, including real exchange rate appreciation, the impact of weaker activity in the EU, and lower energy prices.

Economic activity in Central and Eastern Europe and the Baltic States decreased overall to 3%, from 3.8% in 2000, demonstrating the region's exposure to the slowdown in export trade with the EU, and reduced foreign direct investment. In Poland, activity weakened sharply (+1.5%); while in Hungary and the Czech Republic, it remained relatively robust at +3.7% and +3.3% respectively.

By contrast, the recovery in Southeastern Europe gathered speed in 2001, with average growth reaching 4.2%, up from 2.8% in the previous year, assisted by further increases in investment and consumption.

Developing Countries

Growth in the developing countries slowed to 4%, from 5.8% in 2000, but was supported by relatively strong activity in China and India. Inflation rose by 6%, or about the same increase witnessed in 2000. The decline in output followed the downturn in the industrialized countries, which exerted a negative influence on trade and financial market confidence, primary commodities' prices, and some sectors - notably information and communication technologies (ICT) and tourism.

Africa

In Africa, output grew by 3.5%, from 2.8% in 2000, driven by stronger growth in North Africa and a modest increase in activity in sub-Saharan Africa. The average inflation rate was subdued at 12.8%, down from 13.5% in 2000, although it remained a concern in some countries, particularly Angola, Congo D.R., Zimbabwe and Ghana. The fall in global demand for African exports - especially in the EU, which absorbs about 40% of the total - and the drop in fuel and non-fuel commodity prices, negatively affected not only the poorest countries in the region but also the oil exporters.

The acceleration of growth in North Africa was primarily due to improvements in Morocco, where growth reached 6.1%, up from just 0.8% in 2000, following the country's recovery from drought. Growth also accelerated slightly in Tunisia to 5.4%, up from 4.7% the year before. In contrast, growth in Egypt moderated to 3.3%, from 5.1% in 2000, reflecting both the slowdown in credit expansion from earlier unsustainable rates and a downturn in tourism receipts.

A relatively strong growth of 4% and above was recorded in Botswana, Cameroon, Ghana, Tanzania, and Uganda. However, the decline in agricultural commodity prices - notably as regards coffee and cotton, but also aluminum, copper and tobacco - contributed to weaker economic performance in Benin, Chad, Kenya and Mali, as well as in Malawi, Mozambique, Zambia and Zimbabwe. The prolonged decline in gold prices weighed somewhat on South Africa's economic performance, with output increasing by only 2.2%. Inflation in this country reached 5.8% and unemployment remained extremely high at over 35%. In Côte d'Ivoire growth contracted slightly, reflecting political uncertainties which affected public finances and contributed to a weak investment climate.

Asia

Aggregate output growth in developing Asia decelerated to 5.6%, from 6.8% in 2000, with inflation rising to 2.8%, from 1.9% in the previous year. The decline was a result of several factors, including the negative impact of the global slowdown on tourism and exports, particularly in the ICT sector on which many Asian economies are highly dependent.

The four newly industrialized Asian economies (Korea, Hong Kong SAR, Singapore, and Taiwan, Province of China) were hardest hit by the slowdown in global trade and activity, given their high degree of exposure to the technology sector. Average growth declined dramatically to 0.4%, from 8.2% in the previous year, while the average inflation rate rose to 2%. Growth also slowed markedly in the member countries of the Association of South East Asian Countries (ASEAN), Indonesia, Malaysia, Philippines, and Thailand, to 2.4%, from 5% in 2000, with Malaysia, where ICT exports are more important, suffering the steepest decline. The weakening of activity in both the newly industrialized and ASEAN economies was initially caused by adverse external influences, including lower export demand, but the slump spread increasingly into domestic demand and a broad range of non-electronics and service sectors.

Economic performance in South Asia also weakened, reflecting sluggish export growth, adverse weather conditions, and the sharp impact on tourism of the heightened security concerns in the wake of the September 11th events. Growth in India - one of the two largest economies in the Asia region - slowed slightly to 4.4%, mainly because of falling exports in conjunction with a range of domestic shocks, including the effects of drought, energy price increases and the devastating earthquake in Gujarat. Severe drought also added to Pakistan's financial difficulties, where growth was held down to 3.7%. In Bangladesh, output rose by 4.7%, following a slowdown in 2000 due to floods.

By contrast, activity held up relatively well in the former centrally planned Asian economies (Cambodia, China, Lao PDR, Mongolia, and Vietnam). The Chinese economy remained strong despite the global slowdown, partly because China's share of high technology exports in GDP was smaller than in most other emerging Asian economies. Output expanded by 7%, compared to 8% in 2000, led by strong public investment and buoyant private consumption. Growth in Vietnam slackened to 4.7%, mainly as a result of the unfavorable external environment, in particular the low coffee prices.

Middle East

In the Middle East, growth was adversely affected by oil markets developments, lower production, lower tourism earnings, weaker export expansion and remittances, domestic and external pressures, and the regional security situation. Output in non-OPEC countries rose by 3.2%, down slightly from the previous year, while inflation stood at 2.3%.

In Turkey, GDP contracted by 6.1%, compared to 7.2% in 2000, reflecting persistently high interest rates, rising financial market uncertainties, and weaker growth in export earnings. Inflation eased only slightly to 53.9%, as the disinflation process was hampered by further currency depreciation. And in Jordan, growth slowed to 3.5%, partly as a result of a downturn in tourism. Economic vulnerabilities were acute in Lebanon, with government deficit and debt reaching very high levels.

Latin America and the Caribbean

In Latin America, following a strong recovery in 2000, output dropped by 3.1 percentage points to 1% in 2001, reflecting the impact of the global economic slowdown, the economic crisis in Argentina, and factors external to the region. The average inflation rate eased to 6.3% from the 8.1% level recorded in 2000.

In Argentina, the deteriorating global and regional outlook and international financial pressures added to domestic factors that contributed to a weakening of investor confidence in the sustainability of the country's fiscal, exchange rate and financing arrangements. Output contracted by 2.7%, against a decline of only 0.5% in 2000. Argentina's financial turbulence impinged on a number of neighboring countries, notably Brazil, where output dropped to 1.8%, down from 4.4% in the preceding year.

Growth in the Andean region moderated as a result of the deteriorating external and regional environment. Output slowed down in Chile to 3.3%, in Colombia to 1.4%, and in Peru to 0.2%. In contrast, growth in Ecuador strengthened to 5.2%, up from 2.3% in 2000, assisted by the construction of a new oil pipeline, and inflation continued to decline as dollarization took hold.

Economies in Central America and the Caribbean were strongly affected by the negative impact of the U.S. slowdown on export trade, remittances, tourism, and offshore financial services. Mexico, in particular, witnessed no growth, compared to an increase of 6.9% in the previous year, reflecting the economy's vulnerability to developments in the United States. Growth also weakened in the Dominican Republic and Guatemala. By contrast, countries in the Caribbean region experienced relatively solid growth despite weakening tourism revenues. Economic activity was boosted by investment in natural gas and petrochemicals in Trinidad and Tobago, and by tourism and infrastructure in Grenada and St. Kitts and Nevis. In Jamaica, a long period of economic stagnation came to an end.

OPEC member states

The OPEC member countries faced a number of external and domestic pressures on their economies in 2001. Overall output rose by 3.2%, down from 4.8% in the preceding year. Most notable among the factors affecting these countries were oil market developments. In an attempt to maintain oil prices within the targeted range of $22-28 per barrel, production was curtailed. In the OPEC member countries, oil production averaged 27.16 million bbls/d in 2001, and the value of oil exports dropped by 20%. The average spot price of the OPEC reference basket softened to $23.12 per barrel, from $27.60 per barrel in 2000. The drop in oil export value led to a general weakening of the fiscal and external positions in many OPEC member states, although in some the impact was cushioned by prudent fiscal policies. Despite weaker oil prices, however, progress continued towards institutional and structural reforms aimed at diversifying the economy and improving the climate for private sector-led growth and investment.

In Algeria, GDP grew by 1.9%, down from 2.4% in 2000, supported by improvements in agricultural performance (+10%) as a long period of drought came to an end. Inflation rose to 4.2%, from 0.3% in the previous year, and the current account surplus narrowed to 12.8% of GDP, down from 17.3% in 2000. Unemployment remained very important, especially among young people. Further measures were taken towards deregulation, particularly in the telecommunications, mining and banking sectors. Other structural reforms aimed at promoting trade liberalization and private sector-led growth, particularly in the non-energy sectors of the economy, were initiated.

Economic activity in Gabon rose slightly by 1.6%, compared to a decline of 1.9% the previous year. The improvement was due to the good performance in the non-oil sector, particularly in the wood industry and telecommunications. The inflation rate, which stood at 0.5% in 2000, rose to 2.1% in 2001, and the unemployment rate remained high at 20%. Structural reforms concerning privatization of public and parastatal enterprises were pursued with a view to favoring the emergence of the private sector.

In Indonesia, growth slackened from 4.8% to 3.1%. The slowdown resulted from various factors, including lower oil production and a tightening of monetary policy to contain inflation, which rose to 11.5%, from 3.8% in the previous year. Exports, especially of oil, declined in line with the global and regional downturn, while import growth picked up somewhat as household demand strengthened, causing the current account balance to narrow to 3.4% of GDP, from 5.2% in 2000. Despite the external financing pressures, the government continued to promote privatization and structural reform, particularly in the areas of banking and corporate debt restructuring.

Output in the Islamic Republic of Iran slowed to 4.5% from 6.1% in 2000. The reduction in oil production and prices was offset by strong growth in non-oil activities, driven both by a recovery in the agricultural sector and an increase in domestic demand. However, inflation rose to 16%, from 12.6% in 2000, and the current account surplus narrowed to 4.1% of GDP from 13% in the previous year. Additional steps were taken to promote economic liberalization, private sector job creation and foreign investment with the establishment of the country's first private banks, and the adoption of the Law on the Attraction and Protection of Foreign Investment in May.

Growth in Iraq deteriorated to 1%, from 4% in 2000, owing primarily to decreases in oil production and prices, and severe disruption to oil-for-food exports in protest of the UN economic sanctions. Inflation climbed to 60%, reflecting increased shortages in all goods. The current account, however, showed a surplus equivalent to 9.3% of GDP.

Output in Kuwait declined to 2.1%, from 4% in 2000, mainly because of the oil production cuts and low activity in the non-oil sector. Inflation rose slightly to 2.5%, and the current account surplus slid by 4% to 35.3% of GDP. Efforts were made to implement a package of structural reforms designed to encourage employment, growth and investment in the non-energy sectors of the economy, including a law to facilitate foreign direct investment.

Output growth in the G.S.P. Libyan A.J. decelerated by 1% to 5.5%, chiefly as the result of lower oil export income. Inflation remained steady at 12%, while the current account surplus widened to 8.4% of GDP, from 6.7% in the preceding year. Despite the drop in oil prices, the government continued to press ahead with reforms aimed at diversifying the economy, strengthening the private sector and attracting foreign investment.

In spite of a sharp increase in activity in the non-oil sector, growth in Nigeria weakened slightly to 3.5%, owing largely to reduced oil production and prices. Inflation surged to 19.3%, from 6.9% in 2000, reflecting increased public expenditure, while the current account slipped from a surplus of 4.8% of GDP in 2000 into a deficit equivalent to 4.1%, mostly because of lower oil revenues. Nevertheless, sustained progress was made towards fiscal decentralization, banking sector reform and the creation of an enabling environment for both private enterprise and domestic and foreign investment through further deregulation, privatization and trade liberalization.

Qatar turned in a growth rate of 5.7%, up from 4.3% in 2000, driven mainly by an upturn in production and exports of liquefied natural gas (LNG). Inflation eased slightly to 2%, from 2.5% in 2000, and the current account surplus grew to 25.6% of GDP, up from 16.7%, reflecting the strong growth in LNG exports. Further headway was made in exploiting Qatar's vast natural gas reserves through the construction of LNG production facilities and a string of related industries, including petrochemicals. Noticeable improvements were also made in restructuring the banking sector.

GDP in Saudi Arabia grew by 2.2% despite the decline in the oil sector. Further measures were taken to enhance growth and employment opportunities in the private sector, attract foreign investment and promote trade linkages at both regional and global levels. Inflation declined by 0.8%; and the current account surplus was equivalent to 5% of GDP compared to a surplus of 9% in 2000, a reflection of the weakness of the world economy and its adverse impact on the oil market.

Output in the United Arab Emirates (UAE) rose by 3%, compared to 6% in 2000, owing to weaker demand for oil and non-oil exports. Inflation dropped to 2%, from 4.5%. The current account surplus narrowed to 10.7% of GDP, from 14.8% in 2000, reflecting lower receipts from oil, trade, tourism and financial services, including re-export trade. Nevertheless, endeavors intensified to diversify, liberalize and privatize the economy, and to seek foreign direct investment, particularly in the services sector.

In the Bolivarian Republic of Venezuela, GDP increased by 2.7%, compared to 3.2% in 2000, supported primarily by rapid public expenditure growth, while inflation eased somewhat to 12.6%. Although the oil stabilization fund helped cushion the effects of the decline in oil revenues, fiscal and external positions were hit hard, with the current account surplus shrinking from 10.8% in 2000 to 4.3% of GDP in 2001. Nonetheless, tangible progress was made in speeding up privatization and enhancing the role of small- and medium-sized private enterprises in the economy.

Financial and foreign exchange markets

The central banks of the major industrial countries, in an effort to arrest the economic slowdown, moved to ease their monetary policies. In the United States, the restrictive monetary policy of 2000 was rapidly reversed in 2001, causing the discount rate to fall and reducing the three-month rates on dollar deposits to the lowest level since 1961. In Europe, the rates on the euro and the British pound were also lowered during the year, bringing down short-term interest rates.

In view of the deteriorating global economic conditions and weakened inflationary expectations, long-term interest rates in major industrial countries fell through most of 2001. The 10-year bond rates in the United States, despite edging up during the second quarter, continued to be depressed throughout most of the year. In Japan, long-term interest rates remained flat for most of the year, reflecting expectations of a prolonged recession and persistent deflationary pressures. In the developing countries and countries in transition, rates remained under upward pressure during most of 2001, as the conditions in Argentina and Turkey renewed investors concerns about emerging markets fundamentals and weakened the demand for government bonds.

World equity markets fell significantly in 2001: in mature markets, equities rallied temporarily in late spring, but then fell substantially because of weak corporate profitability results, poor growth prospects, and the events of September 11th. The slowdown in international capital flows was accompanied by downward movements in equity prices in most developing countries, with some like Argentina, Turkey and Brazil, experiencing larger volatility as a result of deteriorating economic fundamentals. Nevertheless, where capital inflows were more stable, emerging markets performed better: prices in Russia, Chile, Mexico, South Korea and Taiwan witnessed significant improvement in both local currency and U.S. dollar terms towards the end of the year.

In foreign exchange markets, the U.S. dollar remained strong against the euro and the Japanese yen during the greater part of the year, despite lower interest rates and the sharper slowdown in the United States. The Japanese yen, after remaining stable against the dollar for most of 2000, started to weaken in 2001, particularly towards the end of the year. The euro, on the other hand, gained some strength against the U.S. dollar during the first quarter, following the European Central Bank's cuts in interest rates. These gains, however, eroded as the economic fundamentals in Europe weakened. In emerging markets, with a few exceptions such as Brazil and Turkey, currency fluctuations remained muted because of satisfactory reserves, the move away from adjustable peg towards managed-floating exchange systems and less reliance on short-term capital inflows.

Transaction volume in global foreign exchange markets in 2001 continued to decline. Average daily turnover on traditional markets in April 2001 was $1,210 billion compared to $1,490 billion three years ago, representing a decline of 19% at current exchange rates, or 14% at constant exchange rates. The decline appears to be linked to the introduction of the euro, the consolidation in banking and other corporate sectors, and the growing share of electronic brokering in inter-bank spot transactions.

External payments and debt

The aggregate current account deficit in the advanced economies narrowed slightly to about 0.9% in 2001. Although the U.S. current account deficit was reduced by 0.5%, it remained high at 4% of GDP. In Japan, the surplus narrowed slightly to about 2.1% of GDP, owing to deteriorating exports and the continued sluggish demand for imports. In the euro area, the current account improved slightly.

In the developing countries, the aggregate current account surplus dropped by 1% to 0.1%. Mainly as a result of declining oil exports, the Middle East suffered the largest drop in the current account surplus, from 11.6% of GDP in 2000 to only 6% in 2001. Africa recorded a current account deficit of 0.8%, due to the downturn in oil export revenues and the softening of other non-fuel commodity prices, as well as the high external debt servicing costs. In 2001, Asia and Latin America also registered deterioration in their current account balances: +1.1% and -3%, respectively.

The current account position of most of the countries in transition deteriorated in 2001, reflecting lower demand in Western Europe, and weakening primary commodity prices. Only the Russian Federation and Ukraine managed to maintain surpluses of about 11% and 3% of GDP, respectively.

Net private capital flows to emerging market economies reached $20.1 billion in 2001, representing an increase of about 125% over 2000, but remaining well below the 1999 level of $59.6 billion. The depressed net private capital flows reflected the continued high outflows, particularly from fuel exporting countries, as well as reduced inflows due to decreasing world demand for manufactured electronics, and turbulent conditions in some countries such as Turkey and Argentina. Net private capital to the crisis-hit emerging economies of Asia continued to be outward-flowing for the fifth consecutive year, increasing from $20.9 billion in 2000 to $24.1 billion in 2001. The Middle East also experienced an increase in capital outflows from $22.4 billion, to $29.2 billion.

The levels of the overall external debt of developing countries remained the same in 2001 as in 2000, as a result of positive net capital flows and further debt relief operations. It declined slightly from $2,204 billion in 2000 to $2,195 billion and debt service payments shrunk somewhat from $339 billion in 2000 to $328 billion.

In the countries in transition, despite their deteriorating current account position, the stock of external debt also remained relatively unchanged from the previous year at approximately $365 billion. Debt service payments likewise stayed at the same level ($49 billion), representing 14% of exports of foods and services during 2001.

World Trade

As a result of the global slowdown, world trade contracted sharply, increasing by just 1%. The exports of the advanced economies, which had increased by 11.6% in 2000, dropped by 0.3% in 2001, while imports declined by the same percentage, as compared to an increase of 11.5% in 2000.

The weak domestic demand in advanced economies reflected negatively on developing economies' exports of both manufactured goods and primary commodities, with the countries dependent on information technology exports, such as the Asian emerging markets, most affected. The events of September 11th restrained trade flows even further. By exacerbating cyclical downturns and raising transportation and freight costs, they caused severe contraction, particularly in tourism and business travel. Both developing countries' exports and imports saw a marked deceleration, growing by merely 3.4% and 5% in 2001, respectively, compared to 15% and 16.1% in 2000. Trade in countries in transition also slowed, although less substantially than in the other regions; exports increased by 11.2% and imports by 7.8%.

The downward pressure on commodity prices exacerbated the economic impact of the decline in trade. Countries dependant on exports of primary commodities, witnessed significant deterioration in their terms of trade in 2001 (-11%).

Global economic prospects

While there are some signs that recovery may get under way in 2002, the outlook remains very uncertain. The possibility exists that economic and financial difficulties are in store for many countries. Measures have been taken to support economic activity in most major industrial countries. Monetary policy has been eased substantially, most notably in the United States. Economic fundamentals, such as lower inflation and stronger external financial positions, have strengthened in many emerging market countries, particularly in Asia.

Global economic activity is expected to increase in 2002 by the same level recorded in 2001 (2.4%). In the advanced economies, however, growth is projected to be only about 1%. Growth for the developing countries as a whole is expected to increase by 4.4%, as compared to 4% in 2001, supported by relatively strong activity in China and India and an improvement in the Turkish economy. The largest declines are likely to be registered in Latin America, especially in Argentina and Mexico, and among the ASEAN member countries.