Recovery of the World Economy, Decline of Unemployment in Europe

The outlook for the world economy has brightened noticeably. The situation in Asia, Russia and Latin America remains unstable, but economic growth continues at a high level, at least for the time being, in the USA, and the economic recovery is gaining momentum in Europe. If the forces stimulating domestic demand gain further strength, a clear improvement of the labour market situation is to be expected. After the financial and economic crises of the recent past, the fundamentals of the world economy have improved considerably. Dynamic export growth and higher public spending resulted in a recovery of production and demand in Asia; on this basis, the growth forecasts of the OECD and the IMF were revised upwards – some even by a considerable margin. However, a number of important sources of danger persist, besides the social problems caused by the recession. The appreciation of the yen might easily jeopardise the beginning recovery of the Japanese economy, which in turn would have a negative impact on the entire region. In the banking sector of Japan and, above all, South-East Asia, profound structural problems remain unsolved, as is illustrated by the large number of non-performing loans. Latin America is in a recession. Brazil, which has just devalued its currency, and Argentina, which is paying a high price in economic terms for the maintenance of a fixed exchange rate against the dollar, are equally affected. In Russia the economic and social outlook remains gloomy in view of the multitude of institutional problems confronting the country, but the 1998 devaluation of the rouble and the oil price increases have had a positive impact on production, the balance on current account, and the public budget. Central and Eastern Europe has a high growth potential, but for the economies in transition the process of catching up with the West is being interrupted by restrictive measures of monetary and budget policy intended to reduce their high current account deficits. In the USA, domestic demand is not showing any signs of weakening. For the fourth consecutive year, real economic growth is close to 4 percent in 1999; as a result, unemployment is declining and public budget surpluses are growing. However, assuming a correction of overheated stock prices, the very low savings ratio is expected to return to its long-term average in the coming years, which in turn will result in a noticeable slow-down of consumer demand. The Asian crisis having been overcome, almost all EU countries experienced an economic upswing, which was supported, above all, by lively demand from the USA and the weakness of the euro. Exports and industrial production have been gaining momentum. Germany and Italy, whose economic policies do not permit a fast recovery of demand, are lagging behind. The most recent decision by the ECB to increase interest rates came as a surprise in view of the early phase of the cyclical upswing and the persistent price stability; in Germany, in particular, it is too restrictive. At the same time, domestic demand is rising fast in France, Spain and most of the smaller EU countries. Economic growth in the EU is expected to increase from 2 percent in real terms in 1999 to about 3 percent in the coming two years. A steeper rise of demand for consumer and capital goods will result in accelerated employment growth. Together with other labour-market policies adopted within the framework of implementation of the European Employment Policy Guidelines, this is expected to reduce the level of unemployment substantially. Thus, the unemployment rate might drop to 8.5 percent in 2001 in the European Union.