Although there is still almost a month to go before the beginning of the New Year, forecasters are issuing their prognostications for 2003 along with their excuses for being off the target in 2002. Official agencies such as the European Union and the Organization for Economic Cooperation and Development (OECD) are joining the chorus. There is no question that geopolitical uncertainties dampened growth this year in the major industrial countries, but they have depressed the outlook as well. International manufacturing overcapacity and the ongoing war issue aren't helping matters, making new capital spending less likely.

GDPs Not Bad
All major industrial countries grew in the third quarter albeit some barely. And the outlook indicates that virtually all of the Group of Seven (G-7) countries and Australia should pick up steam in 2003. The Canadian and Australian economies outperformed all others in 2002. Britain grew at a fairly steady pace and fought off recession, unlike some others. However, of those countries capable of being engines of growth for the rest of the world - Japan, Germany and the United States - only the U.S. is pulling its share. Growth elsewhere was achieved virtually on the coattails of strong U.S. imports and relatively weak currencies when compared with the U.S. dollar.

To illustrate the wide range of worldwide growth rates, the first two graphs below show recent year-over-year gross domestic product (GDP) growth rates for the major industrialized economies. In the first graph are the United States, Britain, the European Monetary Union and Japan. The second graph includes the EMU's three largest economies - Germany, France and Italy - plus Australia and Canada. The third graph shows the OECD forecasts for the G-7 and Australia. Although the graph shows a point forecast, a more prudent approach would look at a range.

Europe crawls along
EMU - The European Monetary Union (EMU), which encompasses 12 national economies but relies on the big three - Germany, France and Italy - has been stagnant and barely growing in 2002. Part of the problem is structural. But another part of the problem is the dichotomy between fiscal and monetary policy. While the European Central Bank (ECB) governs monetary policy, fiscal policy is left to 12 individual governments who do not always see eye to eye with the ECB. Of the big three, France continues to perform better than either Italy or Germany on the strength of domestic demand. OECD's projections for the EMU are for GDP to rise a meager 0.8 percent for 2002, but bounce up 1.8 percent in 2003 and 2.7 percent in 2004.

Many of Germany's economic ills can be traced back to German reunification in 1989-90, when appropriate economic policies to deal with the unification's aftermath were not developed. The result has been an economic imbalance that has snuffed out any chance of a self-sustaining upswing in the east and is making the unification of the two unequal parts far more expensive than even the pessimists feared. Germany's economic woes have placed a huge strain on the United States as the world's sole economic locomotive. And because Germany is the main trading partner for most European countries, the EMU as a whole is on a low growth trajectory.

OECD slashed its German forecast and now expects this year's GDP growth to be only about 0.5 percent, while for 2003, GDP growth should pick up to 1.5 percent and 2.5 percent in 2004. Considerable risks to the projections exist given the uncertainty surrounding the pace of the recovery of world trade and the time needed for consumer and investor confidence to return. Increased growth should come from a gradual rise in exports and stronger investment, while the contribution from private consumption is expected to remain weak in 2003.

France has been far more successful in introducing structural reforms (such as the 35-hour workweek) and has promoted growth, competitiveness and employment. This has helped the country grow at a more rapid rate than either Italy or Germany. Demand has been supported by relatively robust personal and government consumption expenditure while investment spending remained weak and inventories low.

But the OECD cut its projection for growth this year to 1.0 percent from the 2.0 percent that was forecast only last June. French economic growth should begin to rebound in the second half of 2003 and surpass the potential trend in 2004. The economic recovery is likely to begin with inventory rebuilding and a rise in exports. These should bolster business sentiment and investment. GDP is projected to grow 1.9 percent in 2003 and 2.9 percent in 2004.

Italy's economy growth in 2002 was minimal. Business sentiment has not helped to get the Italian economy on track. GDP growth has petered out in 2002 but rose to a preliminary estimate of 0.5 percent in the third quarter when compared with last year.

A pickup in world trade would boost exports while low real interest rates should help revive domestic demand. OECD presented a bleak picture for Italy's economic prospects over the next few years, forecasting weak growth, public finance problems and an end to the long-running decline in the unemployment rate. The OECD envisages 2002 average GDP growth of 0.3 percent, 1.5 percent GDP growth for 2003 and 2.5 percent growth in 2004.

Asia - a tale of two countries
Australia - The Australian economy has proven to be very resilient despite the worldwide growth slowdown. The economy was spurred on by consumer spending and a construction boom. Low mortgage rates boosted residential construction, and that spending spilled over to more purchases of household furnishings and electrical appliances. Because of the vigorous growth, the Reserve Bank of Australia has already raised key interest rates in the face of rising prices.

The economy continued to defy gravity and to perform strongly as buoyant domestic demand more than offset export weakness. With monetary conditions remaining supportive and the global environment expected to improve, economic growth is projected to remain robust, despite the current severe farm drought. The labor market should improve while wage moderation and productivity gains help keep inflation and labor costs under control. GDP is projected to grow 3.5 percent in 2002, 3.7 percent in 2003 and 3.8 percent in 2004.

Japan - The economy here, after three quarters of positive sequential growth, is showing signs of slipping once again. The third quarter was the first in four quarters that the economy grew when compared with the prior year. But deflation continues to be debilitating. Bank and bad loan problems still need to be confronted. And with exports slipping, the fragile recovery is imperiled, adding impetus to plant closings, bankruptcies and unemployment. The export boom in the first part of the year masked many problems. The economy is far from out of the woods as long-term problems persist.

GDP growth is projected to ease to around 0.9 percent for 2002. Japan is projected to grow at 0.8 percent and 0.9 percent for 2003 and 2004, respectively. Financial sector strains, including the need to issue a large volume of public debt without pushing up interest rates, present formidable challenges.

Americas - Canada surprises while U.S. has spastic recovery
Canada - The Canadian economy has held up well during the past year. Often, the Canadian economy is considered the stepchild of the U.S. economy. But that hasn't been so since the third quarter of 2000. In each quarter (with the exception of the second quarter of 2002) the Canadian economy has outgrown the United States when compared with the previous year. After skirting recession during the global slump, Canada continues to bound ahead at a surprising pace.

Consumer and business confidence indicators point to weaker growth in the second half of the year, but any slowdown is likely to be short-lived, with growth expected to pick-up during 2003. The slowdown in the U.S. recovery and an easing in booming residential construction are expected to dampen growth. GDP was forecast to rise 3.3 percent in 2002. Growth was expected to recover from a brief second-half lull, boosted by domestic spending and a recovery in business investment. GDP is expected to grow 3.1 percent in 2003 and rise to 3.5 percent in 2004. Growth is set to exceed its potential rate of around 3 percent a year and unemployment is forecast to decline to around its structural rate of 6.75 percent by the end of 2004.

United States - After negative second and third quarters in 2001, the economy returned to growth in the fourth quarter. Since then, the recovery has been erratic with GDP growing anywhere from a low of 0.1 percent (Q4 2001) to a high of 3.2 percent (Q3 2002). Exporting countries such as Japan and Germany are especially dependent on a U.S. recovery to revive their economies given the absence of domestic demand. And U.S. consumers have done their part by maintaining demand for imports such as automobiles. Although the dollar has weakened in 2002, it remains at a relatively high value, especially against the euro and yen. Although the recovery has been spastic, the seeds continue to build towards a sustainable recovery. Market players are waiting for capital spending to pick up here and overseas as well.

The U.S. economic recovery remains fragile. U.S. economic growth is projected to pick up slowly over the course of 2003. GDP is expected to grow 2.3 percent in 2002, 2.6 percent in 2003 and 3.6 percent in 2004. The consumer has carried the burden of the recovery so far, but continued improvement in GDP growth depends on an investment recovery following the recent gains in productivity and profits. The OECD said that the U.S. recovery is carrying much weight for the global economy. The global recovery is slow and fragile and its momentum is, in the initial stages, heavily dependent on developments in the United States. Most forecasts carry an Iraq and terrorism caveat to the downside.

Bottom line
Forecasters have had an embarrassing 2002. They repeatedly found themselves lowering their forecasts as overcapacity in worldwide manufacturing proved more troublesome than thought. Structural problems in Europe and Japan continue to get in the way of more robust growth, while the overhang of a possible war with Iraq and terrorist threats persist. The world economic recovery continues to be more hesitant and less widespread than expected. OECD's uncertainty is shared by other economic forecasters, government and private alike. Most economic upturns in the months after a recession are uneven at best, but one worry now is that unexpected events could push the recovery off course. Another concern is whether policymakers can deliver the economic reforms needed to establish sustainable growth more firmly, especially in Europe and Japan.

Anne D. Picker, International Economist, Econoday