Long Guoqiang

I. Slowdown in World Economy

The strong growth of world economy in 2000 is out of people’s expectation. Some international organisations and financial institutions recently readjusted their forecast to a higher growth rate of world economy this year. It is predicted by IMF that the world economy will grow at 4.7% this year, the highest in past 17 years. The growth rate of world trade is also expected to reach 10.7%.

Rapid growth of world economy this year is due to the fact that the major economies in the world have been growing well. The US is experiencing the longest period of prosperity since the World War II. It has been the locomotive of the world economy for 9 years. The economic growth in the US is even stronger this year, it is anticipated that the growth rate will reach 5.2%. The drive for the continued economic growth in US is believed to be "new economy", which is characterized by high growth rate, low inflation rate and low unemployment rate. The new economy is a joint result of the corresponding high production rate generated by technological progress, increase of investment in new-tech, flexible capital and labour markets, suitable macro-management, economic globalisation and the fortune effect brought along by the stock market. Although Europe has not completely got rid of the pressure of high unemployment, the economic growth rate has increased from 2.4% last year to 3.4% this year. The growth rate is as high as 8.5% in Ireland, 5% in Finland, 3.5% in France and 3.1% in the UK. Having experienced depression for nearly ten years, the Japanese economy has recovered from the negative growth in 1998 and is expected to reach 1.6% this year, which is 1.4 percentage points higher than last year. The economic growth is attributable to a series of government policies on financing for small and medium-sized enterprises and on individual house purchasing. It is also generated by the rapid growth of IT industry in the world. Apart from Japan, the newly industrialized economies (NIEs) in East Asia have demonstrated a tendency of strong recovery, which is mainly generated by export. The economic growth rate in Asia (excluding Japan) will increase from 6.4% last year to 7.2% this year. The growth rate will be as high as 9.5% in South Korea, 8.4% in Singapore and 8% in China and Hong Kong SAR. The growth rate in Latin America will climb from 0.1% of last year to 4.3% this year.

Despite the fast growth of world economy, however, there exists an internal trend for downward adjustment. The actual output in some developed countries such as Canada and the US has exceeded their potential capacity of output. According to the general rule of economic fluctuation circle, it is time for the growth rate of world economy to move downward to a certain extent. At the same time, with the rise of oil price on the international market, unstability in the world financial market and the uncertainty of economic development of major developed economies, there is greater possibility for a fall of the world economic growth rate. International organisations and famous investment banks have all lowered their forecast for international economic growth in 2001. For instance, IMF predicts that the growth rate for world economy would drop to 4.2% and Morgan Stanley believes it may slide to 3.9%. Despite the differences in detailed predictions of various institutions, it is a mainstream judgement that the growth rate for world economy in 2001 will be lower than this year. It is noteworthy that the growth rate of the world economy in 2001, even though it may likely plunge, will still be higher than the average annual growth rate of 3.6% in the past 30 years.

II. Uncertain Elements to Be Concerned

1. Rise of oil price on the international market

Since OPEC members began to earnestly implement the policy of guaranteeing price by output restriction at the end of 1998, the low price of oil on the international market is gone for good. The price went up, without stopping, from the lowest point of less than US$10 per barrel to top of US$30 and stays, above at present. This rise is a result of both the basic elements of demand and supply on the international market, and some speculation elements. Given the basic elements, it can be seen that demand for oil has increased sharply with the rapid economic recovery of East Asia. Meanwhile, the continued low price of oil led to a decrease in investment in oil production, shipping and refining, which in turn cut the capacity of the above three lines. Insufficiency in oil refining has been, in particular, a "bottle neck" for the increase of oil supply. Therefore, the aggregate supply is insufficient, to some extent, as against the aggregate demand. A more important reason for the rise, however, is the large-scale dealing of international speculative capital on the futures market.

The influence of oil price over the world economy is decided not only by how high the price is, but also by how long the high price remains. The longer the price stays high, the more negative effect it brings about. The total investment of oil companies in the developed countries decreased drastically by nearly 20% in the first half of this year, compared with the same period of last year. Meanwhile, the peak season for oil consumption in winter has started in the Northern Hemisphere. It is not likely for oil price to plunge deeply in the near future. As predicted by concerned institutions, the oil price would possibly fall to around US$25 per barrel by the end of 2001 and then stay at this level for a certain period.

Continued high price of oil will generate the following negative effects on the world economy. Firstly, the major oil import countries are under the pressure of inflation. According to OECD, for every US$10 rise in the oil price per barrel and if the price remains for one year, inflation will consequently rise by 0.5% in developed countries. Pushed by the oil price, the inflation rate of the US for the first 7 months this year was nearly 4%, which was 1.3% higher than last year. Under the dual pressure of oil price hike and depreciation of Euro, the pressure of inflation has obviously increased in the Euro region. Secondly, with the increased pressure from inflation, it is more likely for the central banks of the developed countries to readjust upward their interest rates. The interest rates in the EU and the US have soared up six times in succession, which will in turn slow down economic development. It is estimated by OECD that the growth rate would go down by 0.25% in developed countries for every US$10 rise in oil price per barrel. Once the growth rates of developed countries decline, the lower growth of import of these countries will in turn affect the developing countries. The East Asian economies are mainly export-oriented and heavily dependent on oil impot, therefore, they suffer the most from the negative effect of the oil price rise.

Would the current oil price rise trigger off a global "oil crisis" as it did before? Seen from the demand of the developed countries, the developed economies have become much less dependent on oil after experiencing the previous three times of oil crisis because they have improved their efficiency in oil consumption, developed substitute energy and shifted their economic structure towards service and high-tech areas. For example, the unit energy consumption of GDP in the US is only 40% of that in 1973. The proportion of global oil consumption to world production value has eased to 1.5% from 7% in the 1980s. On the other hand, the current oil price is only half of that in 1981 during the oil crisis and two thirds of that in 1990 on the basis of comparable prices. No crisis as serious as in the 1970s is expected unless the oil price rockets to US$70 per barrel. Therefore, the current oil price rise is unlikely to lead to global economic recession, although it would bring along negative effect on world economic growth.

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