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Sustaining world growth tops G8 summit agenda

Neville Nankivell

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 phase.

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 this year.

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 increased.

(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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