World Growth Prospects Still Dimming

For those without economics degrees this is a simple guide to something significant which happened in the world of economics today that has relevance to the person on the street.

World Growth Prospects Still Dimming

WHAT HAPPENED?

Consensus Economics based in London released the results of their monthly survey of a few hundred economists around the world on how they feel their economies will grow. On average this year our top 14 trading partners are expected to grow 2.7% whereas one month ago the common view was 2.8% and seven months ago 3.5%. Over 2004 better growth of 3.4% is expected, unchanged from the February survey results and just above average growth in our trading partners for the past ten years of 3.2% per annum. Growth was 2.9% in 2002 and 1.4% in 2001.

WHY DID THIS HAPPEN?

The survey results are not good for this year and the below average forecast growth of 2.7% mainly reflects expectations of weak growth at 2.4% in the United States, 0.6% in Japan, 2.1% in the United Kingdom and 1.4% in Europe. The deterioration in forecasts from a few months ago reflects

- worries about war in Iraq cutting into consumer spending and business investment and hiring,
- weak US economic data suggesting the early-2002 upturn was a blip rather than a new trend, and
- loss of any hope of growth-stimulating reforms in Japan.

WHO IS AFFECTED AND HOW?

Exporters because weak foreign growth on top of a rising exchange rate suggests little scope for most of this year for commodity prices to rise, a risk of below average tourist numbers growth, and weak demand for manufactured goods.
Housing sector operators because the worse things look overseas the higher the net flow of migrants into New Zealand is likely to be. But the greater this short term boost the worse the pullback over 2004 once weak export incomes kick through into the domestic economy.
Borrowers because the Reserve Bank will be concerned about the impact of weak export returns on overall economic growth and inflation so will be more inclined to cut interest rates slightly.
Investors because continuing downward revisions to world growth suggest still poor performance of sharemarkets.
Businesses and their capital expenditure plans because the worse the outlook for world growth the greater the reticence about boosting and modernising capacity.

WILL THIS CONTINUE?

It is hard to say too much just ahead of what may be going to happen in Iraq, but the risk is that once the cheering stops if an attack occurs and US victory is swift then worries about weak world growth will resume. Given the high uncertainty though probably the safest thing to say is that the much-hoped for upturn in US and world growth risks being pushed still further into the future in a process which started in about August last year.

DISCLAIMER
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