World growth in 2005: lower than in 2004, but more synchronized than ever.
One must start with a comparison of forecasts of economic growth for 2004 and 2005. Both forecasts were composed in November 2004, which means that the 2004 forecast should be very close to the actual growth rate. In Figure 1, each country is depicted by a single point, where its position on the horizontal axis represents the 2004 forecast and the vertical axis shows the 2005 forecast. The 45-degree line splits countries in two groups: countries above this line are expected to have higher growth rates in 2005 than in 2004, and countries below it are expected to slow down in 2005 compared to 2004.
[FIGURE 1 OMITTED]
A growth rate of 2.0 percent in 2004 seems to be the "magic" number; all countries below this benchmark are expected to grow faster in 2005 than in 2004, and almost all countries above it (with the exception of Canada and Denmark) are expected to slow down in 2005. Since the faster growing economies will slow down and slower growing ones will accelerate, the growth in these 15 countries will be even more synchronized in 2005 than in 2004. Among the main reasons for such synchronization is integration of financial and commodity markets, which becomes even stronger over time and induces co-movement of business cycles across countries.
It should be noted that the growth in 2005, on average, will decrease among the chosen 15 countries. The largest drops in GDP growth rates are expected in Japan (from 4.3 percent to 2.1 percent), the United States (from 4.4 percent to 3.4 percent), and Britain (from 3.2 percent to 2.7 percent).
Attention must now be given to the growth rates of 24 emerging economies. Predictions regarding 2004 and 2005 were generated by The Economist using the same methodology as for the previous 15 countries. As in the previous case, a comparison of forecasts for 2004 and 2005 is presented. In Figure 2, each country is depicted by a single point, where its position on the horizontal axis represents the 2004 forecast and its position on the vertical axis is the 2005 forecast.
[FIGURE 2 OMITTED]
Out of 24 emerging economies, only four are expected to have higher growth rates in 2005 than in 2004: Egypt, India, Israel, and South Africa. For most of the countries, a growth slowdown is predicted. Furthermore, the largest drops in growth are expected among the fastest growing markets, e.g., Turkey (from 9.1 percent to 5.0 percent), Singapore (from 8.3 percent to 4.4 percent), and Hong Kong (from 7.6 percent to 4.6 percent). As a result, the average growth rate in the emerging markets will be significantly lower in 2005 than it is in 2004.
As in the previous case, the growth rates are expected to drop more for the fastest growing economies, which makes growth rates more synchronized among the emerging economies. Moreover, a sharp expected decline in the average growth rate of the emerging markets reduces the gap in growth rates between emerging markets and developed economies (the previously analyzed 15 countries), which leads to even greater synchronization of world growth.
In short, economists expect lower growth rates for the vast majority of emerging markets and for half of the developed economies. In both groups of countries, the largest drops in the growth rates are expected in the fastest growing economies, which lead to even more synchronized growth rates in 2005 than in 2004. Even though the world growth rate is expected to decline, the growth rate of each of the studied countries is expected to be positive both in 2004 and 2005, which according to The Economist has never been the case since at least 1980.
Volodymyr Lugovskky, Ph.D., Fogelman College of Business, The University of Memphis
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|Date:||Jun 22, 2004|
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