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Financial Post Articles
GLOBAL OUTLOOK ENTERS DICEY NEW PHASE:
growth tops G8 summit agenda
Financial Post, Weekly edition,
Thursday, May 14, 1998
When Prime Minister Jean Chretien mingles this weekend with
leaders of the world's largest industrial economies, he'll be able
to brag Canada now has the fastest job growth and best fiscal health
in terms of public-sector deficits. Canada's growth rate, while
slower than last year, will also be at or near the top of the group
and well above the expected average of around 2%. However, as heads
of government of the G8 summit (the Group of Seven plus Russia) meet
in spiffed-up Birmingham, the global outlook is entering a dicey new
Japan, the world's second-largest economy, is in recession and
could be for some time. It's been hit hard by the currency crisis in
emerging Asian economies, as well as its own internal financial
troubles. Our exports to Japan plummeted 38% in the early months of
With the notable exception of Britain, most European Union members
will take the plunge into adopting the euro at the start of 1999.
There's still much uncertainty over how successful this historic
project will be. It comes at a pivotal time for Germany, France and
Italy. Their growth has long been sluggish, but is picking up again.
Jobless rates remain high -- 12.5% in France, where unions are
perversely demanding substantial wage increases.
Fortunately, the U.S. economy -- key to Canada's prospects --
remains remarkably robust. But as lower Asian demand for imports
bites, growth next year could be much slower -- just 2% compared
with nearly 3% this year. The British economy, another important
market for us, has also been doing well, but is beginning to show
signs of a downturn. Sterling's high value is hurting exports.
Growth next year could fall below 2%.
Russia's economy has finally turned the corner after many years of
contraction. But erratic political leadership and slow market
economy reforms obscure the outlook. The government struggles to
carry out basic functions such as tax collection.
It's Japan's woes, however, that will dominate G8 discussion on the
global economy. The well-regarded London Business School's Centre
for Economic Forecasting has just cut back its world growth
estimates because of the "radical change" in Japan's prospects.
Brian Henry, the centre's director of research, says average growth
this year for the G7 economies is now forecast at 2%, compared with
2.6% last year, with a further slowing to 1.9% next year. Japan's
economy will likely contract by about 1% this year and expand
slightly again in 1999. But the centre warns it could easily slip
back into recession.
Japan has introduced a package of tax cuts and public-sector
spending projects to juice up growth. "Without it, the economy was
set for a very deep recession, almost a free fall," says the
centre's Alistair Barr, an expert on Asian economies. But he adds
the overall return on public works projects will be low because
they're a "make-employment" scheme -- new roads in places that
don't need them, for instance. Also, the tax cuts are temporary and
Barr expects most will translate into savings, not spending. The
Japanese government is so desperate to boost consumption it's
advertising ways to spend tax-cut proceeds. Japan's jobless rate is
only 3.9%, but it's the highest since the early 1950s.
Asian financial markets are still tense, with Indonesia especially
under pressure and rioting in the streets there. The region's
economic downturn has only just started, the LBS team believes.
Also, high growth is slowing in China, which escaped the brunt of
the region's currency crisis. Business investment there is
faltering. Consumer spending is weak.
One danger associated with the troubles in Japan and other parts of
Asia is that renewed trade tensions seem inevitable, the LBS team
warns, as companies there push exports into North America and Europe
to keep up production. This will be especially true if the yen falls
sharply in the second half of the year, as the centre predicts.
Sustaining world economic growth and improving job prospects are
high on the summit agenda. The overall environment is still
reasonably good. But clearly threats to continued expansion have
(Ed. note) Neville Nankivell is The Financial Post's
editor-at-large, based in Ottawa.
Source: This information is provided by the Financial Post.
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