Global Growth Prospects Improving

Earlier this year, real GDP growth in the developed economies was percolating at 4% or better, much like the United States. However, global growth slowed sharply in the third quarter and financial markets appeared to discount future prospects as recession fears caused equity prices to slump. The Goldman Sachs Economic Research Group sees a global rebound ahead in 2001, not as strong as early this year but significantly better than the experience of the past several months.

The recent slowdown was likely caused by four factors:

• Higher oil prices had a contractionary effect on demand. G-S economists estimate that disposable income in the developed economies was cut by about 0.7% due to higher oil prices.
• Central banks around the world tightened monetary policy between mid-1999 and mid-2000.
• Global equity prices plateaued during 2000, after rapid increases in previous years. Consequently, the positive wealth effects that normally accompany rising equity prices have been diminished this year.
• Investment in technology and capital spending this year, relative to last year, has been smaller because Y2K-induced spending is now behind us. Capital investment has slowed this year as a result.

Looking forward, G-S economists see the impact of each of these factors abating in the coming months. The drag imposed by higher oil prices is probably peaking about now, and the extra oil revenues received by OPEC countries will begin to translate into increased orders and purchases from developed economies, contributing to export growth. Central banks have ended their tightening phase and will likely stand pat in the coming months. Consequently, the contractionary impact on global economic activity will gradually dissipate. For both of these reasons, the fears of a looming recession that have been holding down global equity prices will likely diminish in the coming months, sparking a rebound of as much as 20% from third quarter, 2000 levels. Such a rebound would spur additional consumer spending. Consequently, G-S economists look for GDP growth in Europe of about 3.1% for 2001, 2.6% growth in Japan and about 3.0% overall for the OECD countries.