World Growth in 2004 Will Be the Strongest Since 2000

After three difficult years, the world economy will enjoy its strongest growth since 2000, reports Nariman Behravesh of Global Insight Inc. (www.globalinsight.com).

Following weak expansions of only 1.9% in 2002 and 2.5% in 2003, growth this year is likely to reach a respectable 3.7%. The United States and China will likely account for a disproportionately large share of this expansion.

The U.S. economy enters 2004 with strong momentum and bright prospects. The expansion that began timidly in late 2001 gained buoyancy in the summer of 2003, when tax cuts sparked an 8.2% annualized surge in economic activity. After a 3.1% increase in 2003, real GDP is projected to advance 4.7% this year, its fastest growth since 1984.

Federal tax cuts, low interest rates, a depreciating dollar, rapid productivity growth, surging profits, and a stock market rally are driving the economy forward.

While the Eurozone is forecasted to achieve its strongest expansion of the past four years in 2004, this will result in GDP growth of just 1.8%. Nevertheless, this would still be welcome, given that growth was just 0.9% in 2002 and was even weaker at an estimated 0.5% in 2003.

However, a number of factors are likely to limit the pace of recovery in Europe. Although tax cuts are occurring in several countries in 2004, the overall fiscal stance across the region is restrictive. A high euro value will mean competitiveness will be seriously eroded, and firms will be cautious about investment and employment.

Asia is geared to have a very strong 2004. All major demand components — consumption, investment, and exports — are poised to expand synchronously for the first time since the 1997-98 Asian financial crisis.

Excluding Japan, the region is projected to expand by more than 6%. China will once again lead the pack, but with growth at 7.7%, below last year’s sizzling 8%-plus growth rate, as both exports and state-led investment will likely show some moderate cooling. Japan is expected to grow at a 2.4% rate this year, following an estimated 2.2% rise last year.

This year will turn out to be the best for Latin America in more than half a decade. One of the key driving forces behind this improved outlook is the recovery in the world economy.

There are also internal reasons for Latin America’s more rapid growth this year. First, these economies are coming out of a period of very weak growth or contraction, so a cyclical rebound is an underlying basic source of strength. Second, the region’s currencies are sharply lower in both nominal and real terms after a decade of overvaluation in the 1990s. Third, agricultural producers are enjoying a very strong market for exports. Strong demand from China remains at the heart of export growth in Brazil and Argentina.

Global Insight’s Canadian Service provides analysis, data, and forecasts for the Canadian economy and the individual provinces. The Canadian Service Forecasting Team has won a KPMG award for forecast accuracy three times over the past decade. For more information, visit www.globalinsight.com.