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GLOBAL GROWTH SCENE IS LOOKING GOOD: Canada's solid performance bound to continue

Neville Nankivell

(Ed. note) Neville Nankivell is The Financial Post's editor-at-large, based in Ottawa.

Financial Post, Daily edition, Tuesday, August 19, 1997

With the U.S. expansion still robust, forecasts for global economic growth have been revised upward. This is good news for the Canadian economy, which while getting a lift from improved domestic demand still depends heavily on exports.

The London Business School Centre for Economic Forecasting in Britain now estimates that growth in gross domestic product this year for the G7 group of industrial countries will average 2.8%. This would be the best performance since the late 1980s.

Canada should post the strongest growth, our own forecasters predict -- around 4% versus 3.5% or so for the U.S. Britain is expected to have growth of 3.3%, the LBS team forecasts, with Germany and France at 2.3%, and Japan a touch over 2%. Only Italy's GDP is more or less flat, growing at around 1%.

Prospects for Japan, Germany, France, and Italy look stronger next year, with growth rates in the 2.5%-2.9% range. They should be able to maintain this sort of pace through 1999 too, the LBS team thinks.

Growth for the U.S. and Britain, however, is expected to slow during 1998 and 1999, but still to be between 2%-2.5%. Canada could do best next year too, some forecasters believe, with growth of at least 3.5%.

Importantly, global growth is mostly being accompanied by surprisingly few price pressures. Inflation rates of the G7 economies are only expected to average around 2% to the end of the decade. This trend is a significant change from what has happened in earlier post-recession periods, such as the 1980s when prices took off and brought expansion to a halt.

This time all major industrial countries still have inflation rates below 3%, which underpins hopes of sustaining steady expansion and bringing unemployment down.

Some central banks, such as those in the U.S. and Britain, have already tightened monetary policy to some extent. There is anticipation the U.S. Federal Reserve may tap the brakes again with another small move up in rates. Jittery stock markets have been reflecting concerns over higher interest rates, which would make equities less attractive. However, easy credit isn't what's needed at this point in the U.S. business cycle. Pre-empting a rise in inflation is best for the long-run health of financial markets. The Bank of Canada, which has stopped easing credit conditions, is also expected to raise rates again at some point soon.

The long, stable U.S. expansion, now in its seventh year, is also forcing economists to rethink theories of what happens when unemployment drops as low as it has there -- to 5% -- without triggering a resurgence of inflation. The LBS team believes the U.S. has had strong growth without undue price pressures because of fundamental supply-side improvements, including productivity improvements from wider use of information technology.

There is some evidence, the centre says, that the ``natural rate'' of unemployment for the U.S. -- the non-accelerating inflation rate of unemployment -- is now 5%-6%. This is well below what was previously thought possible. Despite continued growth, U.S. consumer price increases are actually running at a slightly lower annualized rate than last year. Producer price increases have been at a slower pace too.

While the outlook for global growth is generally positive, there are potential pitfalls, not least of which is whether U.S. monetary policy management will be successful. There are worries that Britain's robust growth could come to an unsettling end. Sterling has been strong and unemployment has dropped, but inflation has picked up and interest rates are on the rise. A ``soft landing'' may be difficult to bring off. In continental Europe, the French and German governments are struggling with policy problems as they try to meet criteria for the single-currency launch planned for 1999.

The Asian Tigers have been in trouble with a series of devaluations after currency market turmoil. However, growth rates are still expected to be relatively high for most Southeast Asian economies. Growth in China is also likely to continue at 10%, despite structural problems.

Latin America continues to make a comeback, with growth this year predicted at more than 5% versus 3.5% in 1996. All in all, the global trading environment remains pretty promising. This should help keep our own expansion going.

Source: This information is provided by the Financial Post.

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