World Economic Review: August 1999 - July 2000

Other key developments during 1999 and the first half of 2000 included the rise in world oil prices to their highest levels since 1991 - which fuelled protests across Europe - with a bottoming out of many other commodity prices, a firming of interest rates in advanced economies, except Japan, and gains in most equity markets, driven by large share prices of technology-related firms. Prices have since been revised downwards, due to inflationary fears and subsequent interest rate increases by the U.S. Federal Reserve and the European Central Bank. The economic/financial problems related to the year 2000 (Y2K) computer bug failed to materialise, due to the planning and remedial efforts undertaken by the private sector, governments and international institutions.

The period also witnessed a highly undervalued volatile euro, hitting record lows against the U.S. dollar and most other currencies in mid-May and again in September of 2000. Although the weak euro has helped to jump-start an export-led recovery in the euro area in the aftermath of the 1998 slowdown, a sustained period of currency misalignment may hinder adjustment of the existing current account imbalances across the three major currency blocs, which could increase the prospects of a disorderly adjustment in exchange rates.

After fourteen years of negotiations, China has finally reached bilateral agreements on the terms of its entry to the World Trade Organisation (WTO), with most of the trade partners participating in accession negotiations, including the United States and the European Union. WTO accession could prove to be a watershed for reform in China, and given the size of China's economy, this should have a significant impact beyond the mainland. This is especially true for Hong Kong SAR, which could face increased competition from Shanghai, as a financial centre, within the next five to ten years.

Key Developments in Emerging Markets and Advanced Economies

Growth in Brazil continues to recover, led by exports, which surged as a result of the depreciation in early 1999. But rising consumer spending and investment have also contributed, more recently, to the recovery. Mexico's economy continues to expand at a healthy pace, as it has been doing since 1995, backed by prudent monetary policy, as well as higher oil prices, rapid growth in the United States, buoyant spending, and healthy demand for investment goods. After a severe recession in 1999, the Argentine economy has begun to recover at a still gradual pace which, in the absence of external shocks, is expected to accelerate in 2001. In the Caribbean, strong demand for tourism from the United States has helped to support economic activity. Growth remains strong in Trinidad and Tobago, partly reflecting some diversification of the economy into sectors such as manufacturing and services, while Jamaica is beginning to recover from a lengthy recession caused by financial sector difficulties and a severe drought.

In Asia, the recovery from the 1997 - 98 financial crises and subsequent recession was impressive. The rapid recovery of output in Korea, Malaysia and Thailand was fuelled by continuing monetary and fiscal stimulus, as well as external demand, supported by a recovery in prices of electronics. The recovery of activity in the countries most affected by the 1997-98 crisis is expected to continue, with growth in the countries where the recovery is least advanced, still below their more advanced counterparts.

The Russian economy is continuing its rapid recovery from the financial crisis of 1998. After expanding by 3.2 percent in 1999, real GDP growth accelerated further in early 2000 and is now above pre-1998 crisis levels. Much of the growth in 1999 was driven by favourable terms of trade shocks whose benefits were initially expected to be temporary. Higher energy prices, import compression, and increasingly buoyant growth in non-energy exports have resulted in a strong external position. Longer-term economic prospects continue to depend upon accelerating the slow pace of structural reform. The revival of activity in Russia is particularly benefiting close trading partners, such as the Ukraine. Indeed, Ukraine is expected to grow for the first time since the start of transition, but progress on structural reform remains slow.

In Africa, growth slowed in 1999, mainly reflecting weakness in several large countries. During 1999-2000, the rebound in world oil prices, as well as recent increases in OPEC oil production quotas, have boosted economic activity and prospects for most of the oil producing countries in the Middle East and Africa. The rise in oil prices have led to stronger fiscal and external balances in these countries and also to improved confidence and greater domestic demand. Output growth was weak in these countries, however, because the rise in global oil prices was caused in part by reduced oil production, which is a large part of economic output. Many of the non-oil producing countries in the region have faced substantial terms-of-trade losses as export prices of non-fuel commodities and other primary goods remain generally depressed, particularly in real terms, while oil import prices have risen.

World trade volumes picked up in 1999 and helped improve the external environment for many countries. Imports into advanced economies grew robustly; this largely reflected the continued strength of domestic demand growth in the United States and the recovery in Europe that began in the second half of 1999. Imports of the advanced economies in Asia and the Pacific region were also strong, except for Japan, where domestic demand was largely stagnant. Demand in China for foreign goods and services also increased robustly, although the reported increase in imports in part reflected a vigorous anti-smuggling campaign. In contrast, in the Western Hemisphere, needed macroeconomic adjustment led to a fall in imports in all the larger developing countries except for Mexico.

Commodity Prices

The prices of many key commodities have moved relatively independently over the past 12 months. While fuel prices have increased sharply, prices of non-fuel commodities have staged modest recoveries at best, with agricultural prices being particularly weak, despite rising global demand. This is due in part because production did not adjust quickly to the slump in demand in 1998-99. The prices of other non-fuel commodities have shown modest increases since early 1999, but remain well below their 1995-97 averages. The prices of most metals and some other industrial inputs have already increased from their lowest levels in mid-1999, but the increases have been less than might be expected given the rise in global demand. For example, through the end of August 2000, the price of copper remained about 30 percent below its 1995-97 average, in part reflecting, until recently, high stock levels. This continuing weakness is also due to the slow pace at which supplies of these commodities have adjusted to market conditions. As with agricultural goods, metal prices are expected to increase but remain below previous peaks, with the exception of nickel, which surpassed its average price in 1995-97.

Oil prices hit almost $38.00 a barrel during the 3rd week of September, more than three times its level at the end of 1998, the highest since the Gulf War. This rise in price from historically low levels was attributed in part to voluntary supply restraints by some of the major oil producers, the strong U.S. economy and the unexpectedly robust economic recovery in Asia. The increase in oil prices has put upward pressure on inflation in many countries, but not to the same extent as the oil price increases of the 1970's, and core inflation measures were largely unaffected.

There has been increasing pressure on OPEC producers to increase output, which they did by 800,000 barrels, after which oil prices still increased. However, developed nations such as the U.S. have maintained that OPEC has not done enough to ease high prices. OPEC responded by saying it will not release more oil than the market needs, in fear that prices might collapse in 2001, as they did in 1998, when they registered record lows of US$10.00 per barrel. OPEC posits that the consuming nations' high taxes on gasoline, diesel, heating oil and other products as well as refining and shipping bottlenecks, are the real culprits behind high prices. During the week of September 25, the U.S. responded by releasing millions of barrels of oil usually kept for emergency purposes, which has seen oil prices fall to US$30.00 per barrel thus far. However, with the fast approaching winter season and oil stocks at historically low levels, there is a strong risk that prices could be reversed and spike up to $40.00 a barrel.

Risks

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