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Chapter II. The World Economy
Published online by Cambridge University Press: 26 March 2020
Extract
Scarcely a year ago there was a good deal of discussion about whether the collapse in oil prices would bring about a boom in the world economy. Now there is widespread talk of a world recession. In both cases speculation is likely to prove unfounded. Recent pessimism has been associated with the effects of the dollar's depreciation and lower OPEC demand for manufacturing imports. We argue below that, while both factors could lead to a temporary slowdown in the aggregate level of world activity, they should not lead to a major world recession.
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- Copyright © 1987 National Institute of Economic and Social Research
Footnotes
In the ‘overall outlook’ section we explain why we think the world economy is not heading for recession. The short-term forecast is then presented in detail in sections covering the six major economies, commodity prices and trade. We then have three special sections. The first looks at our model's view of what recent history and current prospects would have been like if oil prices had not fallen last year. A second section considers the prospects for US inflation using econometric evidence in the form of wage and price equations. We focus particularly on the impact of higher import prices following the fall in the dollar. Finaily we present a model simulation in which US policy becomes much more restrictive than in our central forecast because of inflationary fears.
References
(1) The other major difference between our forecasts and the OECD's relates to Japan, where our 3 per cent growth this year and next contrasts with 2 per cent for the OECD. However, the OECD's forecast did not allow for the recent announcement of increased government expenditure.
(2) Although preliminary estimates of the second quarter national accounts were published just before this forecast was finalised, substantial revisions to all demand components going back over a number of years meant that these new figures could not be incorporated on to the model. However, our forecast does reflect recent movements, and so we do not expect these data revisions to substantially influence the forecasts presented here.
(3) It can be thought of as a purely counterfactual simulation, undertaken in 1989, on the assumption that our central forecast for 1987 and 1988 proves precisely correct.
(4) The exception was UK interest rates, where the estimated reaction function produced implausibly large changes in rates.