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Current international economic conditions

1. International oil price

28.38

0

5

10

15

20

25

30

35

Brent crude

US$ per barrel

1996 20012000199919981997

Source: IMF International Financial Statistics

The Organisation of Oil Exporting Countries (OPEC) met on 4-5 June 2001 in Vienna to review the state of the oil market. The cartel observed that the prices of crude oil are relatively stable, with the year-to-date average of the OPEC basket price1 of $24,8 per barrel having been within the agreed range of $22 - $28 per barrel. OPEC again confirmed that the cartel is aiming to stabilise the market at an OPEC basket price of around $25 per barrel. Furthermore, the conference noted that stocks of both crude oil and products are at satisfactory levels. The markets were, however, shocked by a sudden announcement by Iraq to halt its oil exports from 4 June 2001 as a protest against United Nations Security Council’s decision to extend the oil-for-food programme for one month instead of the usual six-month period. Saudi Arabia – the largest oil producer – and other OPEC producers, however, said that they were prepared to make up any shortfall on the world market. OPEC decided to leave production quotas unchanged, but agreed to review the impact of Iraq’s oil export stoppage at an extraordinary meeting in July 2001.

1 North Sea Brent crude is more expensive than the OPEC basket price.

2. Global economic outlook: Real gross domestic product

IMF World Bank OECD

Forecast of GDP growth in 2001

World............................................................. 3.2 2.2 -USA............................................................... 1.5 1.2 1.7Japan............................................................. 0.6 0.6 1.0Euro Area...................................................... 2.4 2.5 2.6OECD............................................................ - 1.6 2.0Developing Countries.................................... 5.0 4.2 -Countries in Transition................................... 4.0 4.1 -

Forecast of GDP growth in 2002

World............................................................. 3.9 3.3 -USA............................................................... 2.5 3.3 3.1Japan............................................................. 1.5 1.8 1.1Euro Area...................................................... 2.8 3.1 2.7OECD............................................................ - 2.8 2.8Developing Countries.................................... 5.6 4.9 -Countries in Transition................................... 4.2 3.8 -

Sources: IMF World Economic Outlook (May 2001), World Bank Global Development Finance (April 2001) & OECD Economic Outlook (May 2001)

There seems to be little consensus among the three main multilateral economic agencies about the prospects for global economic growth until the year 2002. Surprisingly, the World Bank and the IMF display significant differences in their growth forecasts despite the close co-operation that exists between the two institutions on matters concerning the world economy. According to the IMF, global GDP is expected to grow by 3,2 per cent in 2001, well above the World Bank’s forecast of 2,2 per cent during the same period. The 0,6 per cent growth forecast for Japan in 2001 is the only area where the two organisations seem to agree. Nevertheless, this growth forecast is still 0,4 percentage points below the OECD’s forecast of 1,0 per cent for Japan in 2001. Both the World Bank and the OECD expect that the latter’s economic growth will increase by 2,8 per cent in 2002. The highest rate of economic growth is predicted by the IMF for developing countries at 5,0 per cent and 5,6 per cent in the years 2001 and 2002, respectively. Countries in transition are expected to grow at around 4 per cent for the next two years.

3. World economic outlook: Consumer prices

Annual percentage change in consumer prices

Actual Projections

1999 2000 2001 2002

World............................................................. 5.5 4.7 4.2 3.4

Advanced economies.................................... 1.4 2.3 2.1 1.8 USA........................................................... 2.2 3.4 2.6 2.2 Japan......................................................... -0.3 -0.6 -0.7 - Euro area................................................... 1.2 2.4 2.3 1.7

Developing countries..................................... 6.7 6.1 5.7 4.8 Africa......................................................... 11.5 13.5 9.6 5.7 Asia........................................................... 2.1 1.8 2.8 3.2 Western Hemisphere................................. 8.8 8.1 6.3 4.8

Countries in transition.................................... 43.9 20.1 15.3 10.0

Source: IMF World Economic Outlook – May 2001

In an environment of slowing global growth, commodity prices are expected to weaken. Oil prices have retreated from their late 2000 highs, and the IMF expects the risks to be on the downside. As oil prices stabilise, headline inflation in most industrial countries has begun to stabilise. Underlying inflation is also expected to remain generally subdued as a result of moderate wage increases. Inflation, however, remains a concern in some faster growing European countries and in a number of developing and transition countries.

4. Key central bank interest rates

Countries 1 Jan 2001 15 June 2001

Last Change

USA 6.50 4.00 15 May 2001 (-0.50)Japan 0.25 0.00 19 March 2001 (-0.15) Euro Area 4.75 4.50 10 May 2001 (-0.25)United Kingdom 6.00 5.25 10 May 2001 (-0.25)

Canada 5.75 4.50 29 May 2001 (-0.25)Denmark 5.40 5.00 14 May 2001 (-0.30)Sweden 4.00 4.00 7 December 2000 (+0.25)Switzerland 3.50 3.25 22 March 2001 (-0.25)

Australia 6.25 5.00 4 April 2001 (-0.50)New Zealand 6.50 5.75 16 May 2001 (-0.25)Israel 8.00 7.00 29 May 2001 (-0.20)

Indonesia 14.42 16.48 13 June 2001 (+0.15)Malaysia 2.84 2.85 14 June 2001 (-0.01)South Korea 5.25 5.00 8 February 2001 (-0.25)Thailand 1.50 2.50 8 June 2001 (+1.00)Taiwan 4.63 3.75 17 May 2001 (-0.25)

Brazil 15.75 16.75 23 May 2001 (+0.50)Chile 5.00 3.50 12 June 2001 (-0.25)Mexico 18.46 11.33 18 May 2001 (-50 million)*

Czech Republic 5.25 5.00 22 February 2001 (-0.25)Hungary 11.75 11.25 5 February 2001 (-0.25)Poland 19.00 17.00 29 March 2001 (-1.00)Russia 6.00 7.00 15 January 2001 (+0.50)

* The Mexican central bank adjusts the money market shortage (or “corto”) to effect the market rates

Source: National central banks

Global easing continued as the European Central Bank (ECB) surprised markets by cutting its official interest rate by 25 basis points from 4,75 per cent to 4,50 per cent on 10 May 2001. Likewise, the United States continued with its stimulatory monetary policy by announcing yet another 50 basis points reduction in the federal funds rate from 4,5 per cent to 4,0 per cent on 15 May 2001. This brings the total reduction in the federal funds rate to 250 basis points since the beginning of the year. Although a large number of advanced as well as emerging-market economies followed the direction of the ECB and the Federal Reserve with their own interest rate cuts, a significant number of economies decided to maintain their current monetary policy stance. Brazil and Thailand, however, raised official rates since May. The interest rate hike in Thailand followed a public dispute between the prime minister and central bank governor over monetary policy. The prime minister insisted on higher interest rates to encourage consumption and strengthen the currency in order to prevent capital outflows. The central bank governor refused and was fired. The new governor announced on 8 June 2001 that the 14-day repo rate would be increased by one percentage point to 2,5 per cent.

5. USA: Real gross domestic product

1.3

0

1

2

3

4

5

6

7

8

9Percentage change from quarter to quarter

Seasonally adjusted and annualised rates

1996 20012000199919981997

Source: Federal Reserve Bank of St. Louis

Real gross domestic product in the United States is now estimated to have increased by 1,3 per cent in the first quarter of 2001 after increasing by 1,0 per cent in the fourth quarter of 2000. The revised growth rate for the first quarter was 0,7 percentage points less than the previous estimate of 2,0 per cent. The revision reflected lower inventories and consumer spending combined with higher imports than initially reported. Consumer spending still remains the most important pillar of economic growth. A large swing in inventories from accumulation to decumulation, however, lowered the first quarter growth by nearly 3 percentage points. The deteriorating labour and equity markets, however, remain critical factors for personal consumption. The latest available monthly economic data indicate that real GDP growth has slowed down in the second quarter of 2001. There is, however, a good chance that the US economy will return to a sustainable growth path in the second half of the year. The recently approved tax cut package by the US Congress will boost after-tax income by the third quarter of this year. In conjunction with the Federal Reserve’s dramatic easing of monetary policy, these measures could stimulate the economy and bring about a recovery by the fourth quarter of 2001.

6. USA: Industrial production

-2.8

-4

-2

0

2

4

6

8

10

1996 2000

Percentage change over twelve months

Seasonally adjusted

1997 19991998 2001


Industrial production declined by 2,8 per cent (year-on-year) in May 2001, well below expectations. Real output in the manufacturing sector fell by 0,7 per cent (month-on-month). After eight consecutive months of contraction, manufacturing output is now 3,3 per cent below its level in May 2000. The rate of capacity utilisation for total industry also fell further to 77,4 per cent, the lowest rate in more than a decade. The declining industrial production suggests that GDP growth may be negative in the second quarter.

7. USA: Unemployment rate

4.4

3.5

4.0

4.5

5.0

5.5

6.0Per cent of labour force

Seasonally adjusted

200120001999199819971996


The employment situation remained weak in May, although the weakness was not as pronounced or widespread as in the previous month. The total non-farm payroll employment dropped by 19 000 following the steep loss of 182 000 (revised) in April 2001. Manufacturing in particular fared poorly in May with a loss of 124 000 jobs, bringing factory job losses thus far this year to 470 000. The unemployment rate, however, fell unexpectedly to 4,4 per cent in May due to a decline in the labour force.

8. USA: Productivity and cost

Error! Not a valid link. Source: United States Department of Labor

Productivity growth - as measured by output per hour of all persons - for the first quarter of 2001 was lower than initially reported. Revised data indicate that labour productivity declined by 1,2 per cent (seasonally adjusted and annualised) in the non-farm business sector during the first quarter. This was the first decline in labour productivity since 1995. Hourly compensation, however, increased in the same quarter at 5,1 per cent. Lower labour productivity growth accompanied by an increase in hourly compensation resulted in higher labour costs per unit of output. Unit labour costs rose by 6,3 per cent in the first quarter, the fastest pace in a decade. This also represents a significant acceleration in unit labour costs over recent quarters.

9. USA: Consumer prices

3.3

2.6

4.0

1

2

3

4

5

6

7

All Items (percentage change over twelve months)Excluding Food & Energy (percentage change over twelve months)Federal funds rate

1996

Per cent

20012000199919981997


The United States seasonally adjusted all-goods consumer price index (CPI) increased by 0,3 per cent in April 2001, following a marginal increase of 0,1 per cent in the previous month. This sharp increase was assisted by a strong rebound of 5 per cent in gasoline prices. On a year-on-year basis the increase in the overall CPI accelerated from 2,9 per cent in March to 3,3 per cent in April 2001. The monthly core CPI, which excludes the volatile food and energy prices, increased only 0,2 per cent in April 2001, allowing the year-on-year core inflation to decelerate marginally to 2,6 per cent. As widely anticipated, the Federal Open Market Committee announced on 15 May 2001 its decision to cut its target for the federal funds rate by a further 50 basis points to 4,0 per cent. The latest cut is the fifth by the Federal Reserve this year (250 basis points reduction since the beginning of the year).

10. USA: Current account

-31.2

89.5

120.6

50

60

70

80

90

100

110

120

130

-40

-30

-20

-10

0

10

20

30

40

Balance (Right Axis)ExportsImports

Billions of dollars

1998 20001999

Billions of dollars

Seasonally adjusted

2001

Source: US Department of Commerce, Bureau of Economic Analysis

The United States current account deficit widened in March 2001 after improving quite sharply in February. March imports jumped 2,9 per cent (not annualised), but remained 4,5 per cent below their recent peak in September 2000. Exports, however, declined by 1,0 per cent in March and have fallen by 3,7 per cent since its high in August 2000. The current account deficit is likely to remain at a relatively high level in the near term. Slower growth in the US economy will limit increases in imports, but slower growth in many foreign economies should also limit export growth.

11. Japan: Real gross domestic product

-0.8

-14-12-10

-8-6-4-20

2468

101214

Percentage change from quarter to quarter


1996 20012000199919981997

Source: Economic Planning Agency of Japan

Japan’s real GDP contracted more than expected by 0,8 per cent (seasonally adjusted and annualised) during the first quarter of 2001, possibly precipitating a fourth recession in the past 10 years. Dominant in this decline was both poor capital expenditure and domestic private consumption as firms cut back on production amid rising inventories and consumer sentiment remained weak. The continued weakness in the external sector of the economy and the fact that no budgetary expansion of fiscal policy is expected does not bode well for economic growth in the second quarter either. In terms of monetary policy, the Bank of Japan seems to have done enough (albeit increased political pressure to do more) and is now saving its aces in case the situation worsened.

12. Japan: Industrial production

Error! Not a valid link. Source: Japanese Ministry of Economy, Trade and Industry

Japan’s April 2001 industrial production unexpectedly plunged 4,2 per cent year-on-year (revised) after having fallen 2,7 per cent in March due to a drop in orders from the United States and Asia. The stockpiling in inventories suggests that cuts in production will continue further in the month or two ahead.

13. Japan: Unemployment rate

4.8

2.5

3.0

3.5

4.0

4.5

5.0


Seasonally adjusted

1996 20012000199919981997

Source: The Japanese Institute of labour

Unemployment edged up to a near-record 4,8 per cent in April 2001. Employment contracted significantly by 370 000 jobs during the month and the labour force continued to contract and fell by 320 000 workers, reflecting the deteriorating outlook for the Japanese economy.

14. Japan: Consumer prices

-0.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Core CPI (excludes fresh food) (percentage change over 12-months)Official Discount RateUncollateralised Overnight Call Rate (target)

1996

Per cent

20012000199919981997

Source: Bank of Japan, IMF & Management Coordination Agency of Japan

The Bank of Japan’s target of a stable zero or positive core inflation (general price level excluding fresh food) could not be reached as it declined by 0,5 per cent year-on-year in April 2001. Headline inflation also declined by 0,4 per cent in April after being in positive territory for only one month in January 2001. Consumer spending has been declining and has fuelled the deflationary spiral. On 19 March 2001 the Bank of Japan shifted its policy target from the uncollateralised overnight call rate to the balance of funds held by banks in current accounts at the central bank, effectively resuming a zero-interest rate policy.

15. Euro Area: Real gross domestic product

2.2

0

1

2

3

4


1996 20012000199919981997

Seasonally adjusted annualised rates

Source: European Central Bank & Eurostat

According to Eurostat’s recent estimates, the slowdown in real GDP growth in the euro area that started in the second half of 2000, continued in the first quarter of 2001. After increasing at a seasonally adjusted and annualised rate of 2,4 per cent in the fourth quarter of 2000, growth moderated to 2,2 per cent in the first quarter of this year. During the year 2000, euro area real GDP had increased by 3,4 per cent, following a growth rate of 2,5 per cent in 1999. Mr Wim Duisenberg, the President of the European Central Bank, however, recently confirmed in his testimony before the Committee on Economic and Monetary Affairs of the European Parliament that a moderation in real GDP growth is expected in 2001 due to the less favourable external environment. Recently released indicators of economic activity, such as industrial production and business confidence indicators, confirm this moderation. The currently available forecasts, both by international organisations and private institutions, expect that economic growth in the euro area will be broadly in line with trend potential growth2 in 2001.

2 The ECB has estimated that potential output in the euro area grows at a trend rate of between 2 per cent and 2½ per cent per annum over the medium term.

16. Euro Area: Industrial production (excluding construction)

3.2

-2

-1

0

1

2

3

4

5

6

7

8

9

1996


Seasonally adjusted

2001200019981997 1999

Source: European Central Bank

The year-on-year rate of growth in the industrial production index (excluding construction) decelerated from 4,3 per cent in February to 3,2 per cent in March 2001. This slowdown in industrial production confirms the expected moderation in growth in the euro area.

17. Euro Area: Unemployment rate

8.3

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5


Seasonally adjusted

1996 200019991998 20011997


In April 2001, the rate of unemployment for the euro area fell to 8,3 per cent of the labour force, 0,1 percentage points lower than in the previous month. The latest figures confirm that unemployment has continued to fall in the past few months, albeit at a slower pace than last year. Looking at developments in 2001, employment expectations from survey data continue to point to a positive outlook.

18. Euro Area: Consumer prices

2.9

4.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

HICP inflation (percentage change over twelve months)Main refinancing/minimum bid rate

Per cent

1996 20011998 19991997 2000


The annual rate of increase in the overall Harmonised Index of Consumer Prices (HICP) in the euro area rebounded sharply from 2,6 per cent in March to 2,9 per cent in April 2001. The increase is mainly attributable to an increase in energy prices. The outbreak of foot-and-mouth disease in several European countries and the preventative measures taken in order to combat the spread of the disease also resulted in higher unprocessed food prices. At its meeting on 10 May 2001 the Governing Council of the ECB decided to reduce the minimum bid rate on the main refinancing operations of the Eurosystem by 25 basis points to 4,5 per cent. According to the ECB, this decision should be seen as an adjustment of the level of interest rates to somewhat lower inflationary pressure over the medium term. It was also argued that monetary developments in the euro area also no longer pose a risk to price stability (see p. 19 for more detail).

19. Euro Area: M3 Money supply

5.24.7

5.0

0

1

2

3

4

5

6

7

8

M3M3 adjusted for non-resident holdings of negotiable instrumentsM3 (three-month moving average)ECB reference value for M3


1999 2000 2001


M3 growth in the euro area has been on a gradual downward trend since the second quarter of 2000, reflecting the increase in the key ECB interest rates that occurred between November 1999 and October 2000. However, since the beginning of this year, clear signs of an acceleration in the pace of monetary expansion begin to emerge. The twelve-month growth in M3 fell as low as 4,7 per cent in January 2001 before accelerating to 5,2 per cent in April 2001. Consequently, the three-month average of annual growth rates of M3 also increased from 4,8 per cent to 5,0 per cent in March 2001. When interpreting these developments, it should be borne in mind that data on M3 growth have in recent months been significantly distorted by non-resident holdings of negotiable instruments (money market fund shares/units, money market paper and debt securities issued with a initial maturity of up to two years). The impact of non-resident holdings of these instruments has led increasingly to an upward distortion of the annual growth rate of M3 since the third quarter of 2000. According to the ECB there is now clear evidence that the magnitudes involved are higher than previously expected and currently amounts to around half a percentage point of the annual rate of growth of M3. Taking these factors into account, the slowdown in M3 over the last few months was more pronounced than previously thought, with estimates of corrected M3 growth being close to the reference value of 4,5 per cent for some months. The ECB therefore concludes that there is no longer a risk to price stability over the medium term signalled by the analysis of the first pillar.

20. UK: Real gross domestic product

1.7

0

1

2

3

4

5


1996 20012000199919981997


Source: UK Office for National Statistics

In the first quarter of 2001 the United Kingdom economy expanded faster than originally estimated. Latest figures from the Office of National Statistics (ONS) show that real GDP grew by 1,7 per cent (seasonally adjusted and annualised) in the first quarter of 2001, up from 1,6 per cent recorded in the fourth quarter of 2000 and 0,2 percentage points above last month’s preliminary estimate. According to the ONS the foot-and-mouth epidemic had a minimal effect on the output of agriculture and its damage may not show up until the second and third quarters. Overall growth was brought down by a 0,7 per cent decline in both manufacturing and total industrial production, which includes various commodities such as oil and gas. The manufacturing sector has seen slow export growth due to slackening global demand. The strong import growth of 2,2 per cent on the quarter and 9,6 per cent on the year suggests that consumers and companies are exploiting the continued strength of sterling against the euro and other currencies, which has made overseas products more price competitive in the UK.

21. UK: Industrial production

-0.8

-2

-1

0

1

2

3

4

1996 2000


Seasonally adjusted

1997 19991998 2001


In April 2001 the seasonally adjusted index for the output of the production industries in the UK declined for the third straight month, as the global economic slowdown curbed demand for British exports. The year-on-year rate of growth in the industrial production index fell by 0,8 per cent in April, down from a revised zero growth in March 2001. In the three months to April 2001, oil and gas extraction rose by 1,0 per cent compared to the previous three months and was 8,0 per cent lower than in the same period a year ago. Over the same period manufacturing output fell by 1,1 per cent due to significant decreases in the output of electrical and optical equipment industries (-4,4 per cent), textiles, leather and clothing industries (-5,0 per cent) and the rubber and plastic products industries (-2,9 per cent). Between March and April 2001 manufacturing output fell by 0,9 per cent mainly due to a significant fall of 3,7 per cent in the electrical and optical equipment products industries.

22. UK: Unemployment rate

3.2

2

3

4

5

6

7

8Per cent of labour force

Seasonally adjusted200120001999199819971996


Employment has continued to grow and there were falls in both the claimant-count rate and the ILO unemployment rate. In May 2001 the claimant-count rate (the percentage of total labour force claiming unemployment-related benefits) was 3,2 per cent, unchanged from April and the lowest since November 1975. According to the Labour Force Survey (LFS) estimates employment rate was 74,8 per cent in the three months to April 2001, a rise of 0,1 percentage points over the preceding three months. Over the same period the ILO unemployment rate was 5,0 per cent, down 0,2 percentage points from the previous quarter and down 0,7 percentage points from a year earlier.

23. UK: Consumer prices

2.12.4

1.7

5.25

0

1

2

3

4

5

6

7

8

RPI (percentage change over twelve months)RPIX (percentage change over twelve months)HICP (percentage change over twelve months)Repo rate

Per cent

1996 2001199919981997 2000


The annual rate of growth in the all items retail price index (RPI) rose by 2,1 per cent in May, up from 1,8 per cent in April 2001. The largest upward effect on the RPI came from changes in food prices, mainly due to price increases for fresh vegetables and potatoes, as a result of poor weather conditions. A further upward effect came from motoring expenditure, mainly due to changes in fuel prices as crude oil prices continued to rise. Over the same period, retail price inflation excluding mortgage interest payments (RPIX), the measure tracked by the Bank of England for inflation targeting purposes, rose by 0,4 percentage points to 2,4 per cent, the highest annual gain since March 1999 and just below the bank’s 2,5 per cent target. The increase in the RPIX shows that over the last two months the UK economy has not slowed enough to bring prices down, as the RPIX increased in both April and May. Pressure on prices is building as the annual growth rate of producer prices for May 2001 also increased. At its meeting on 4-5 June 2001 the Bank of England’s Monetary Policy Committee (MPC) voted to keep its key interest rate - the repo rate - unchanged at 5,25 per cent. The decision was widely expected for both economic and political reasons. Further rate cuts would lead to even stronger domestic demand, which would result in higher inflation pressures. A rate cut on the eve of the general election would also have been problematic on political grounds. The UK’s harmonised index of consumer prices (HICP) rose at an annual rate of 1,7 per cent in May, up from 1,1 per cent recorded in April 2001.

24. Australia: Real gross domestic product

4.4

-4

-2

0

2

4

6

8


Seasonally adjusted and annualised rates1996 20012000199919981997

Source: Reserve Bank of Australia

Australia’s real GDP increased by 4,4 per cent (seasonally adjusted and annualised) in the first quarter of 2001, following a 2,2 per cent contraction in the fourth quarter of the previous year. GDP was driven by strong growth in household spending of 2,2 per cent (seasonally adjusted), government consumption expenditure of 3,2 per cent and a 3,3 per cent fall in imports of goods and services. The manufacturing sector, however, declined by 2,2 per cent.

According to the 2001/2002 budget presented in May 2001, the Australian economy is expected to grow by 3,25 per cent in 2001/2002. The average unemployment is forecast at 7 per cent, which is around current levels. Furthermore, a underlying cash surplus of A$1,5 billion is expected and the government will have repaid around A$60 billion of net debt by the end of the period in question. Expansionary fiscal policy measures which entail a series of tax cuts and concessions were announced as the budget was framed with this year’s election in mind.

25. Australia: Consumer prices

6.0

5.0

-1

0

1

2

3

4

5

6

7

8

All Items (percentage change from corresponding quarter of previous year)Official cash rate

Per cent

200120001999199819971996

Source: Reserve Bank of Australia

The quarterly rate of growth in the Australian consumer price index increased from 5,8 per cent in the fourth quarter of 2000 to 6,0 per cent in the first quarter of 2001. A quarter-on-quarter increase of 3,1 per cent in food prices was the main reason for the increase in the consumer price index. This was followed by a hike in health costs of 2,8 per cent and alcohol and tobacco products of 2,6 per cent. According to the recent statement on monetary policy, around 3 percentage points of the latest CPI is likely to be the effect of the GST and other tax measures, with a further contribution from the rise in petrol prices. According to the 2001/2002 budget, the inflation rate is forecast at 2 per cent in the coming year. This figure falls within the current inflation target range of 2 to 3 per cent.

The Monetary Policy Board of the Reserve Bank of Australia (RBA) left the official cash rate unchanged at 5,0 per cent after its meeting on 5 June 2001. This follows a similar decision by the RBA taken at the board meeting in April 2001. Nevertheless, the RBA has already reduced the official cash rate by 1,25 percentage points since the beginning of the year. The pace of the easing exceeded that at which interest rates rose last year, and was also faster than the previous period of monetary policy easing in 1996-98.

26. New Zealand: Real gross domestic product

2.2

-6

-4

-2

0

2

4

6

8

10

12



1995 20001999199819971996

Source: Reserve Bank of New Zealand

The GDP of New Zealand increased by 2,2 per cent (seasonally adjusted and annualised) in the fourth quarter of 2000 after the upwardly revised growth rate of 3,2 per cent experienced in the third quarter of the same year. Industries that are involved in exports of primary production and inbound tourism were the major contributors to the fourth quarter economic growth. The continuing increases in dairy production and strong export demand for meat products led to an increase in agricultural activity by 1,6 per cent in the last quarter. On the down side, the economy experienced a fall in construction and retail trade and this reflected the more subdued level of internal demand. According to the 2001 budget outlined in May 2001, the economy is expected to grow at 2,6 per cent for the 2001/2002 fiscal year.

27. New Zealand: Consumer prices

3.1

5.75

-2

0

2

4

6

8

10

12

All itemsOvernight interbank cash rate up to 03/1999Official cash rate from 03/1999

1999199819971996 20012000

Percentage change from corresponding quarter of previous year

Souce: Reserve Bank of New Zealand

New Zealand’s annual consumer price inflation fell from 4,0 per cent in the fourth quarter of 2000 to 3,1 per cent in the first quarter of 2001. This rapid fall was largely due to the substantial impact of the shift to income-related rents by Housing New Zealand and to a fall in petrol prices during the quarter. The Reserve Bank of New Zealand reduced the official cash rate by 0,25 basis points from 6,0 per cent to 5,75 per cent on 16 May 2001. This is the second rate cut in 26 days after the similar easing by 25 basis points on 19 April 2001. Commenting on the decision, Mr Donald Brash, the Governor of the Reserve Bank of New Zealand, said: “… the decision to reduce the official cash rate by 25 basis points reflects the balance of tensions between contradictory influences on the future path of inflation in New Zealand”. Furthermore, the Governor indicated that the business and consumer confidence have fallen, and the investment spending has slowed. Lower growth in New Zealand’s major trading partners was also cited as a reason for the monetary policy decision.

28. Emerging Asian Markets: Real gross domestic product

1.01.9

1.2

-4

-2

0

2

4

6

8

10

12

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Percentage change from quarter to quarter

Indonesia Malaysia Thailand Korea

2000/2001


* Data not available

*

Source: JP Morgan

The East Asian economies are expected to experience much slower growth in the first half of 2001, as external conditions have deteriorated more rapidly than previously foreseen. Asia’s reliance on the exports of high-technology goods is affected by a sharp decline in demand, especially from the United States. Indonesia’s real GDP growth slowed down from 4,0 per cent (seasonally adjusted and annualised) in the last quarter of 2000, to 1,9 per cent in the first quarter of 2001. This slower growth was the result of unstable domestic political and security conditions as well as the slowdown in the global economy. Malaysia’s GDP growth also decelerated from 4,6 per cent (seasonally adjusted and annualised) in the last quarter of 2000 to 1,0 per cent in the first quarter of 2001.

The Thai GDP growth accelerated by 3,6 per cent (seasonally adjusted and annualised) in the fourth quarter of 2000, an improvement from the 2,1 per cent achieved in the third quarter. However, the slowdown in global economic activity is expected to adversely affect the economy. In its effort to pre-emptively mitigate the effects of the slowdown, the Thai government announced tax exemptions to spur demand for property. Korea’s economy averted a recession and grew by 1,2 per cent (seasonally adjusted and annualised) in the first quarter of 2001. This expansion was led by increased exports of semiconductors and telecommunication equipment, but was offset by a decline in domestic spending. However, given that exports make up about half of GDP, the economy is still not out of danger as United States customers have been cutting back on orders.

29. Emerging Asian Markets: Consumer prices

10.8

1.6

2.8

5.4

-2

0

2

4

6

8

10

12

J J A S O N D J F M A M

IndonesiaMalaysiaThailandKorea


2000/2001

Source: IMF, JP Morgan and national central banks

Indonesia’s year-on-year consumer inflation increased by 10,8 per cent in May 2001, higher than the 10,5 per cent in April. The depreciation of the rupiah and the cut in fuel subsidies for industrial users in April strengthened inflationary pressures. A further cut in consumer fuel subsidies in June and a 2,5 per cent increase in value added tax (VAT) could send inflation as high as 13 per cent. Bank Indonesia has maintained a tight monetary policy and has kept the key interest rate above 16 per cent. Malaysia’s year-on-year consumer inflation increased marginally from 1,5 per cent in March to 1,6 per cent in April 2001. Increases in beverage and tobacco as well as transport and communication indices were the main contributors in the price increase. Malaysia’s central bank has maintained its ringgit peg of 3,80 to the US dollar despite falling currencies in the region. In Thailand consumer inflation on a year-on-year basis increased from 2,6 per cent in April to 2,8 per cent in May 2001, reflecting a weak baht. However, at 1,5 per cent the core inflation rate (excludes food and energy) remained within the targeted range. Despite government’s disagreement, the Bank of Thailand’s Monetary Policy Board on 24 May 2001 kept the 14-day repurchase rate at 1,5 per cent, leading to the sacking of the central bank’s governor. Korea’s consumer prices surged 5,4 per cent (year-on-year) in May 2001, well above the central bank’s target band of 2 per cent to 4 per cent. It is expected that the Monetary Policy Committee will keep the overnight call rate at 5 per cent as inflation persists.

30. Emerging Latin American Markets: Real gross domestic product

Source: JP Morgan

Declining global growth, falling commodity prices and the financial turmoil in Argentina have been the most critical factors in the slowdown in Latin America. In Mexico, the economy has technically already fallen into recession, as the first quarter of 2001 was the second quarter posting negative growth rates. Real GDP fell by 1,2 per cent (seasonally adjusted and annualised) in the first quarter of 2001 after a decline of 3,0 per cent in the fourth quarter of 2000. The deceleration of the past two quarters was prompted by the sharp slowdown in the United States and the high integration of the two economies, particularly in the manufacturing sector, where the links are closest and where exports account for a particularly large share of total output. Brazil’s real GDP growth rate slowed to 0,4 per cent in the first quarter of 2001, down from 1,0 per cent in the fourth quarter of 2000. Chile recorded a real GDP growth rate of 2,0 per cent in the first quarter of 2001, down from a revised 4,3 per cent in the fourth quarter of 2000. In Argentina, real GDP grew by 1,4 per cent (seasonally adjusted and annualised) in the fourth quarter of 2000 after a decline of 3,8 per cent in the third quarter.

31. Emerging Latin American Markets: Consumer prices

Source: IMF, JP Morgan and national central banks

The year-on-year increase in Chile’s consumer price index rose by 3,7 per cent in May, up from 3,5 per cent in April 2001. At its meeting in June 2001, the Board of Governors of the Central Bank of Chile voted to cut the main reference interest rate for Chile – the discount rate – by 25 basis points, leaving it at inflation plus 3,5 per cent, the lowest level in 15 years. The bank cited slower-than-expected economic growth, rising unemployment and the absence of inflationary pressures for its decision, which has been widely expected. In Brazil, the latest inflation numbers have run above this year’s official target of 4 per cent plus or minus 2 percentage points. The annual increase in the broad national consumer price index (IPCA), the index used by the Central Bank of Brazil’s Monetary Policy Committee (Copom) as the reference rate for the inflation targeting system, was 7,0 per cent in May, up from 6,6 per cent in April 2001. This increase was mainly due to increases in the prices of non-food products. At its meeting in May 2001, Copom increased its key Selic lending rate by 50 basis points to 16,75 per cent, its third consecutive increase since March. The rate increase was the result of Copom’s concern about the persistence of pressure on the rate of inflation as well as the probable secondary effects of the energy crisis. Mexico’s twelve-month inflation rate decelerated marginally by 0,1 percentage points to 7,0 per cent in May 2001, still above the annual inflation target of 6,5 per cent for 2001. On 18 May 2001 the Mexican central bank, Banxico, decided to loosen monetary policy despite its concerns about high wage costs and the proposed rise in the VAT. The money market shortage or “corto” was reduced by 50 million pesos to 350 million pesos in an attempt to boost domestic demand. The reduction of the shortage induced a lower interest rate as the 91-day Cetes rate – Mexico’s official interest rate – fell by 0,45 percentage points on the day of the cut to 11,65 per cent. Argentina is slipping away from deflation and has recorded an annual growth in consumer prices of 0,2 per cent in May 2001.

32. SADC: Real GDP growth rates

Annual percentage change in real GDP

1997 1998 1999 2000

Africa.................................................. 2.9 3.1 2.3 3.0Angola................................................. 7.7 5.5 4.4 3.2Botswana............................................. 5.6 8.1 4.1 7.7DRC.....................................................-6.4 -3.5 -15.0 *Lesotho................................................ 8.1 -5.4 2.0 2.5Malawi................................................. 5.0 3.3 6.7 3.4Mauritius.............................................. 5.6 5.8 2.6 8.3Mozambique........................................11.3 12.1 9.0 2.1Namibia............................................... 2.6 2.4 2.9 3.9Seychelles........................................... 4.6 5.5 2.9 *South Africa......................................... 2.5 0.7 1.9 3.1Swaziland............................................ 4.0 2.7 3.1 3.2Tanzania.............................................. 3.5 3.7 3.5 5.1Zambia................................................ 3.3 -1.9 2.0 3.5Zimbabwe............................................ 2.8 3.7 0.1 -6.0

Sources: Committee of central Bank Governors in SADC and WEOPreliminary data from Allafrica.com in yellow* Data not yet available

The World Economic Outlook (WEO) forecasts real GDP growth of 4,2 per cent in Africa for 2001 and 4,4 per cent in 2002, depending on the implementation of sound macroeconomic and structural policies, as well as a significant improvement in the security situation in many countries – notably Angola, the Democratic Republic of Congo, and Zimbabwe – where conflicts or domestic turmoil have contributed to a substantial weakening in macroeconomic policies. On average, there was improved economic performance throughout the sub-region in the year 2000, with positive growth rates recorded in most SADC member countries.

The Tanzanian economy recorded a 5,1 per cent growth rate in 2000 and the WEO forecasts 5,4 per cent and 5,7 per cent for 2001 and 2002 respectively. According to the Economic Commission for Africa Sub-regional Development Centre for Southern Africa (ECA/SRDC-SA), economic growth in the Southern African sub-region which was estimated at 3,3 per cent in 2000 (compared to 3,4 per cent in 1999) was negatively affected by the political situation in Zimbabwe, where negative growth was recorded. ECA/SRDC-SA forecasts that aggregate sub-regional GDP will range between 3,5 per cent and 5 per cent in 2001. Swaziland’s 3,2 per cent growth in real GDP for year 2000 was a result of an increase in manufacturing production, spurred by a strong export performance, especially of sugar-based blends, textile products and wood pulp. Negative growth rates were recorded in the manufacturing, transport and construction sectors which, like agriculture, distribution and utilities sectors, recorded modest growth rates. The Mozambican economy grew by only 2,1 per cent in 2000, lower than the country’s Prime Minister Pascoal Mocumbi’s forecast of 3,8 per cent. The main reason for the low growth rate was the catastrophic flooding that hit the southern and central regions of the country in February 2000, causing severe damage to agriculture, and to the road and rail networks.

33. SADC: Inflation

6.77.0

10.4

6.56.6

0

2

4

6

8

10

12

May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr

BotswanaLesothoNamibiaSouth AfricaSwaziland

Annual percentage change

2000/2001

Source: International Financial Statistics (IMF) & Country Quarterly Reports

Inflation rates in SADC countries continued to be characterised by significant divergence. In April 2001, Zimbabwe’s year-on-year rate of inflation increased by 1,1 percentage points to 56,9 per cent. Of the 56,9 per cent twelve-month rate of inflation, increases in food prices accounted for 18,1 percentage points. In April 2001 Botswana’s annual inflation rate decreased by 0,8 percentage points to 6,7 per cent, mainly due to a decline in both rural and urban inflation rates. Malawi’s annual inflation rate stood at 27,4 per cent in April, down from 28,7 per cent in March 2001. Zambia’s year-on-year inflation rate eased by 0,3 percentage points from 29,1 per cent in February to 28,8 per cent in March 2001. Tanzania’s annual headline inflation eased by 0,1 percentage points to 5,4 per cent in January, reaching a record low for the past 25 years. The Bank of Tanzania’s economic review for February 2001 attributed the decline to a slowdown in food inflation. In Lesotho, the annual inflation rate for April 2001 rose by 1 percentage point to 7 per cent. Over the same period Namibia’s twelve-month rate of inflation eased by 0,7 percentage points to 10,4 per cent. Swaziland’s year-on-year rate of inflation increased by 0,35 percentage points to 6,6 per cent in April 2001. Mozambique is gradually recovering from deflation experienced during the first three months of 2001. The twelve-month rate of inflation fell by 1,2 per cent and 0,6 per cent in February and March respectively, after which it grew by 0,5 per cent in April 2001.

34. SADC: Inflation (continued)

228.4

27.456.9

0

80

160

240

320

400

480


AngolaMalawiZimbabwe


2000/2001

Source: National Central Banks

35. SADC: Inflation (continued)

4.4

-0.6

6.2

5.4

28.8

-5

0

5

10

15

20

25

30

35

Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar

MauritiusMozambiqueSeychellesTanzaniaZambia


2000/2001


36. SADC: Bank rate

14.2515.00

11.2512.00

11.0010

12

14

16

18

20

22


BotswanaLesothoNamibiaSouth AfricaSwaziland

Per cent

2000/2001

Source: International Financial Statistics (IMF) & Country Quarterly Reports

No major changes occurred to bank rates in the SADC region recently except for Zambia and Malawi. In Zambia the bank rate was increased from 44,2 per cent in December 2000 to 52 per cent and 60 per cent for January and February 2001 respectively. This was done in order to help achieve targets set by the IMF programme for Zambia. This followed a 68 per cent expansion of broad money during 2000, compared with the programme target of 25 per cent. In Malawi the increase in the bank rate (which follows market rates) for April 2001 was led by the increase in the yield for the 271-day Treasury bill.

37. SADC: Bank rate (continued)

150.0

65.5

57.2

30

45

60

75

90

105

120

135

150

165


AngolaMalawiZimbabwe


2000/2001


38. SADC: Bank rate (continued)

60

10.4

9.955.5

11.3

0

10

20

30

40

50

60

70

Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb

ZambiaTanzaniaMozambiqueSeychellesMauritius


2000/2001


39. SADC: Exchange rates (Domestic Currency/US Dollar)

337.6

169.1

107.4

124.7144.4

80

120

160

200

240

280

320

360

Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May

AngolaMalawiSeychellesZambiaZimbabwe

Index: Jan 2000=100

2000/2001


Most SADC countries’ exchange rates continue to depreciate against the US dollar. The Tanzanian shilling continued to depreciate despite the declining inflation rate. The depreciation trend is attributed to an increase in imports, especially capital goods, and reduction in exports of major cash crops, cashew nuts, cotton and coffee due to volatile world market conditions. In May 2001 the Zambian Kwacha lost ground against the US dollar. The kwacha came under intense pressure with importers’ demand for foreign exchange exceeding supply, culminating to Bank of Zambia’s inability to accommodate bids by importers. The Zimbabwean dollar (Z$) has been pegged at Z$55 against the US dollar in an attempt to ease foreign currency shortages and boost the country’s export performance. However, this level is unsustainable given the country’s high inflation rate.

40. SADC: Exchange rates (Domestic Currency/US Dollar) (Continued)

118.1

111.8

144.9

130.2

106.3

95

105

115

125

135

145

155

Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May

BotswanaMauritiusMozambiqueSouth AfricaTanzania

Index: Jan 2000=100

2000/2001


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