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News Release

Economic Recovery To Be Strong And Globalized

September 9, 2003

Contact:    Michael Mussa    (202) 328-9000
    Martin Neil Baily    (202) 328-9000
    Adam S. Posen    (202) 328-9000

Washington, DC—In its semiannual assessment of global economic prospects, top experts from the Institute for International Economics conclude that the outlook over the next year is for very strong growth in most parts of the world. The Institute today released the latest prognosis by three of its senior fellows: former International Monetary Fund chief economist Michael Mussa, former Council of Economic Advisers chairman Martin Neil Baily, and former New York Federal Reserve Bank official Adam S. Posen.

Many forecasters had already been expecting the United States to recover strongly. Mussa echoes that judgment, projecting US growth at better than 4 percent through at least mid-2004 with a strong possibility of considerably better results for a quarter or two, and Baily expects the rapid growth to start creating substantial numbers of new US jobs in the fourth quarter of this year. However, there have been previously widespread expectations that only China would join the United States in experiencing robust expansion over this period.

The Institute team now believes that, to the contrary, most other components of the world economy will share in the rapid expansion (see table 1). This includes Japan and most of Europe, both of which had until recently been viewed as lagging significantly. Germany is viewed as the only major exception. Hence the strong recovery now appears likely to be globalized.

In addition, positive interaction between the pickups in the different regions can be expected. For example, faster-than-expected growth in Europe and Japan, along with the modest decline in the exchange rate of the dollar over the past 18 months, may at least arrest the steady deterioration in the US trade balance that has deducted an average of 0.75 percentage points annually from US growth in five of the last six years. Stabilization of the external imbalance is thus an important factor in the positive outlook for the United States.

Moreover, strong growth throughout the world adds to the likelihood of implementation of policy reforms that will help sustain that growth and enhance economic prospects for the longer run. For example, the crucial German reforms proposed by Chancellor Schroeder and Japan's efforts to strengthen its banking system are more likely to be pursued successfully in a hospitable economic climate. Their implementation will then enhance both those countries' own performance and, since they are the world's second and third largest national economies, the global outlook as well.

The Institute economists pose questions concerning the long-run sustainability of the expected pickup, an important part of which is stimulated by inherently short-run phenomena such as tax cuts and the steep rise in government spending in the United States. They identify private investment, which has yet to recover convincingly but could also begin to expand rapidly in the near future, as the key to extending buoyant growth beyond 2004. They also emphasize the need for major countries outside the United States, especially in Europe and East Asia, to generate substantial increases in domestic demand in their economies to more than offset the elimination of future increases in their trade surpluses, which would be the counterpart of the stabilization (or possibly future decline) in the US trade deficit.

About the Authors

Michael Mussa, Senior Fellow, served as the chief economist at the International Monetary Fund from 1991 to 2001, where he was responsible for advising the Fund's Executive Board and the management on broad issues of economic policy and for providing analysis of ongoing developments in the world economy. Dr. Mussa served as a member of the US Council of Economic Advisers from August 1986 to September 1988. He was a member of the faculty of the Graduate School of Business at the University of Chicago (1976-91) and was on the faculty of the Department of Economics at the University of Rochester (1971-76). During this period he also served as a visiting faculty member at the Graduate Center of the City University of New York, the London School of Economics, and the Graduate Institute of International Studies in Geneva, Switzerland. He has published widely on macroeconomics, monetary economics, international economics, and municipal finance in professional journals and research volumes.

Martin N. Baily, Senior Fellow, was the chairman of the Council of Economic Advisers and a member of the President's Cabinet from August 1999 until January 2001, after having been a member of the Council of Economic Advisers during 1994-96. He was a principal at McKinsey and Company during 1996-99, where he co-led its Global Institute's projects on services and manufacturing productivity in a number of major countries (including Brazil, France, Germany, Korea, Russia, and the United Kingdom). Dr. Baily has taught at MIT, Yale, and the University of Maryland, and was a senior fellow at the Brookings Institution through most of the 1980s, where he cofounded the microeconomics issue of the Brookings Papers on Economic Activity. He was also an academic adviser to the Congressional Budget Office and the Federal Reserve Board. His research at the Institute focuses on the international competitive position of the United States, and possible strategies to increase productivity and growth in Europe.

Adam S. Posen, Senior Fellow, has been a consultant to the International Monetary Fund and several US government agencies and a visiting scholar at central banks worldwide. From 1994 to 1997, he was an economist in international research at the Federal Reserve Bank of New York, where he conducted research on monetary strategy and was part of the teams covering G7 economic events and European monetary unification. In 1993-94, he was the Okun Memorial Fellow in Economic Studies at the Brookings Institution. In 1992-93, Dr. Posen was resident in Germany as a Bosch Foundation Fellow and worked for the Bundesbank in Frankfurt and the Deutsche Bank in Berlin. He serves on the Council on Foreign Relations' Working Group on Transatlantic Relations and on its Independent Task Force on US-Japan Economic Relations. He is the founding US editor of the refereed journal International Finance. His research focuses on macroeconomic policy in the industrial democracies, G3 economic relations, and central banking issues.

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. The Institute's staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.