European Economies

In the third quarter of this year the world economy grew at its fastest pace for two decades. Much of this was due to the impressive lift-off in America, whose GDP grew at an annual rate of 7.2 per cent. But the recent recovery has been truly global, with most economies picking up speed. Japan’s economy grew at an annual rate of 2.2 per cent in the three months to September. This was faster than expected and marked Japan’s seventh straight quarter of expansion.

But by far the most striking figures have come from emerging economies, notably in Asia. Chinas GDP rose at an annual rate of 18 per cent in the third quarter, seasonally adjusted; Singapore’s grew by 17 per cent, and Taiwan’s by 24 per cent. Russia’s economy expanded by 8 per cent, Argentina’s by 12.5 per cent and Brazil’s by 4 per cent after two quarters of decline. In total, emerging economies grew at an average rate of 8.7 per cent, more than twice as fast as the developed world and their quickest pace since 1994, before the wave of crises that hit emerging markets from Mexico and Asia to Russia and Argentina. The world economy grew by an annualized 5 per cent in the third quarter. Weighted by the GDP measured at purchasing-power parity the growth in the third quarter was an astonishing 6.3 per cent, the fastest since at least the 1980s.

After such a sprint, America and emerging Asia are almost certain to see slower growth in the current quarter and next year. Global growth in 2004 is widely forecast to be above its long-term potential rate for the first full year since 2000. Although many had tipped the world economy to recover in the second half of this year, few had expected such a bounce. Some skeptics say the rebound in both America and Japan has been exaggerated by their GDP deflators. In Japan, nominal GDP is still falling by 0.4 per cent in the year to the third quarter. Yet real GDP growth looks strong because the deflator has fallen by 2.7 per cent.

The euro area is still lagging, but even its economies beat expectations, managing to grow by 1.6 per cent. Recent business surveys suggest stronger growth in the fourth quarter, although much will depend on the euro’s strength. After the economies of America and Japan have picked up speed recently; now the euro area seems to be following in their wake, albeit more sluggishly. After three consecutive quarters of decline, Germany’s GDP rose by 0.9 per cent at an annual rate in the third quarter of the year. France’s rose by 1.6 per cent. Growth for the euro area as a whole is likely to have been only slightly higher, well below America’s stellar 7.2 per cent. Last December the euro-area economy was widely expected to grow by 1.5 per cent in 2003; the latest estimate for The Economist’s poll of forecasters puts it at only 0.4 per cent. In contrast, America and Japan are now forecast to grow by 2.8 per cent and 2.6 per cent respectively, faster than originally expected.

The fourth quarter may produce a stronger performance. Recent business indicators suggest that a bigger rebound is under way; several confidence surveys have surged upwards. The J.P. Morgan Chase now forecasts that the GDP in the euro area will grow at an annual rate of 3 per cent in the fourth quarter-the fastest for over three years. But that may still lag America.

A recovery in the euro area might prove longer-lasting than in America. Consumer spending in Europe, unlike America, has stagnated over the past couple of years, leaving big pent-up demand for consumer durables such as cars and electrical goods. Once consumers’ confidence picks up, there could be a sharp rise in spending.

During the slowdown, employment has held up better in the euro area than in America. Firms have hired more low-paid, low-productivity workers. In the longer term, as more people enter the labour market, there should be permanent uplift for Europe’s economies. The reforms being painfully pushed through by the governments in France and Germany should improve their countries’ longer-term performance. But in the short run, there is also a risk that greater uncertainty caused by cuts in unemployment benefits and more job insecurity may cause households to save more and spend less.

Over the past couple of years, growth has been consistently slower in the big three countries, Germany, France and Italy, than in the smaller ones. But even the smaller economies now disappointed. The Netherlands, once a start performer, has seen output fall by more than Germany over the past year. Ireland’s growth has slumped to 2.1 per cent, from 7.5 per cent a year ago; Finlands has slowed from 4 per cent to 0.8 per cent. Spain has remained the fastest-growing of the larger economies, but it is now looking especially vulnerable.

Spain’s growth is increasingly based on a housing bubble and excessive borrowing. If house prices falter, spending could slow. And although Spain makes up only 9 per cent of euro-area output, it accounts for more than one-fifth of the growth in consumer spending over the past 12 months.

Germany

The German economy, the largest in the euro-zone, is showing signs of recovery for the first time in more than a year as the global upturn, fuelled by rapid expansion in the US, strengthens. Sentiment indicators have pointed to rising business and investor optimism for several months. Provisional estimates of gross domestic product suggest the German economy grew 0.2 per cent in the third quarter of this year, the fastest ace for more than a year.

The Berlin government cut its official growth forecasts for 2003 to zero. It said the economy would grow by between 1.5 and 2 per cent next year, depending, partly, on whether reforms and tax cuts were implemented. So far, most of the optimism in Germany has been fuelled by surveys hinting at forward looking expectations. The bigger than expected increase seemed to ease fears that the fragile German upturn could peter out prematurely. Economists said the improvement in business conditions had signalled the beginning of a recovery.

The rise in confidence has been fuelled by a strong stock market rally, a weaker euro and brighter news from the US and Asia, both big markets for German exports the traditional driver of growth. Hopes are high that strong global demand will ensure the German GDP expands more strongly in the fourth quarter. Signs are emerging of a pick-up in export growth, with Germany’s trade surplus widening in September. However, the latest surveys and data show that actual economic activity remains weak. Most businesses have yet to feel the benefits of improving confidence.

Australia

The 13 years of interrupted growth has brought property to Australia. The country has attained on important position in recent months because of its strategic interest to the US, the global super power, and China, the worlds emerging economic giant, that will be most crucial in shaping this region in the years to come. Australias strengthening economy has posted a far larger budget surplus than foreseen only six months ago. The surplus for the year to next June was now estimated at A$4.6 billion (US$3.4 billion, 2.8 billion, #2 billion), more than double the A$2.2 billion predicted in May. The treasury also lifted its economic growth estimate for 2003-04 from 3.25 to 3.75 per cent and expected consumer price inflation of 2.25 per cent, down from its earlier prediction of 2.75 per cent.

The treasury was able to lift its forecast for the surplus mainly because of a surge in corporate tax receipts which are set to come in A$3.3 billion higher than was expected in may. These will more than offset extra spending of A$1 billion, including A$274 million on Australias intervention to help restore order in the Solomon Islands. The inflation forecast had been cut in part because of the higher Australian dollar and its impact on the cost of imports.