US holds the key as experts hedge their bets over world's growth outlook for year 2000

NEWS ANALYSIS So many got it wrong in 1999 that economists are being doubly cautious in predicting the future of the world's biggest economy

ONE OF the extraordinary features of 1999 is that so many economic forecasters got it so badly wrong. Not surprisingly, many are now doubly cautious about the outlook for the year to come.

With the hangover from the Asian financial crisis expected to slow growth markedly compared with 1998, most forecasts were for a slowdown this year. In fact, the US powered ahead, Europe started to recover, Japan edged away from deflationary recession and Asia rebounded.

Some of the most dramatic forecasting errors concerned the US economy, which is so important in the world economy that if you get that wrong, predictions for other countries will go awry too.

John Llewellyn, the chief economist at Lehman Brothers, bravely admits to having predicted real GDP growth of just 1.7 per cent in the US this year. The actual figure will be closer to 4 per cent.

He was not alone. Last spring, questioned about the IMF's forecasts which showed US growth slowing from 3.9 per cent in 1998 to 3.3 per cent this year, chief economist Michael Mussa joked: "We forecast the US economy would slow down last year and the year before, and we'll carry on predicting a slowdown until the US economy gets it right."

Once again, economists have pencilled in a US slowdown, to varying degrees. Goldman Sachs reckons there will be a very slight deceleration in growth to 3.8 per cent, combined with rising interest rates through 2000. Lehman's paints the same picture.

A new report from ING Barings recognises both the vast uncertainties and the innate caution of economic forecasters. "The most striking characteristic of long term economic forecasts is how conservative they are," says chief economist Mark Cliffe.

He therefore looks at three scenarios. One is a conservative based case which has a gentle US slowdown - a soft-landing followed by gradual take- off. The second is a technology-driven long boom, a genuine New Era for the world's biggest economy. The third is a boom turning into bust mid- way through 2000 as inflationary pressures finally force the Federal Reserve to push interest rates higher.

The base case has US growth slowing to 3 per cent in 2000, recovering to 3.5 per cent in 2001, and settling around 3 per cent in the longer term. Inflation stays close to or below 2 per cent.

In the optimistic alternative, real GDP growth slows to 3.5 per cent in 2000 but then stays above 3 per cent, while inflation slows further from around 2 per cent to just 1 per cent in the longer run.

In the pessimistic alternative, there is little slowdown in 2000 but inflation picks up to 2.6 per cent. To bring inflation back towards 2 per cent, growth has to be slowed to below 3 per cent in 2001 and 1 per cent in 2002, and never climbs back above 3 per cent before the end of the first decade of the 21st century.

What is interesting about looking at different scenarios is that they spell out the kind of things that need to be true for each forecast to be fulfilled. What must New Economy enthusiasts be assuming if high growth and low inflation are to continue? The assumptions are actually highly controversial, even though the pace of technical change is undeniably impressive.

For one thing, it assumes continuing liberalisation of markets within countries and between them so that the economic benefits of technological improvements can be captured. As the chart shows, technological trade has outpaced trade in other goods and services, which in turn has exceeded GDP growth.

Hi-tech trade therefore can drive growth but it has to be allowed to happen. Governments have to create the right institutional framework. What's more, events like the Asian crisis and the demonstrations in Seattle over the WTO and trade liberalisation suggest that there might be setbacks on the path towards ever-freer free markets. As Mr Cliffe puts it, "There are substantial social and political barriers to this outcome."

To list just a few of the obstacles, there is the strong voter demand in many countries for measures to tackle poverty and inequality, there are consumer concerns about some new technologies, there is the ageing population in the OECD (outside the US and one or two small countries) which will compel unpopular pension reforms. If growth faltered at all, governments' ability to compensate losers from the ongoing process of globalisation and liberalisation would vanish.

Nevertheless, looking at the extraordinary forces that have been unleashed in the US economy, most forecasters can not believe that it will be business as usual in 2000 even if the numbers on their computer printouts predict the usual modest slowdown in US economic growth in 2000.

"What is at work is faster and almost certainly bigger than the industrial revolution," said Mr Llewellyn. The big question, he said, is how far it spills over from the US to the rest of the world. "It will put structural reform in Europe even more firmly in the spotlight." He predicts a bounce in EU growth to 3.5 per cent in 2000. Others are more pessimistic about Continental appetites for reform; Goldmans predicts just 2.8 per cent growth, up from 2.1 per cent this year.

As for Japan, the other big economy in the OECD area, nobody can get very enthusiastic about its prospects, although most forecasts think it will continue to emerge from recession. Economic recovery is simply posing too many difficult social and political problems for the fruits of any long boom to bless the Japanese economy quickly.

The highest forecast, in the ING Barings base case is for 2.6 per cent real GDP growth, more than twice 1999's pace. Lehmans actually forsees the economy's pace of expansion slowing a little from just over 1 per cent to 0.8 per cent in 2000. If there is a New Economy, it is going to take even longer to cross the Pacific than the Atlantic.

Start your day with The Independent, sign up for daily news emails
Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing