International Economy

Exchange Rate Movement

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Foreign Exchange Reserves Position

World Economic Trends

US Economy

The Boom

The US economy is booming at a rate of just over 5% per annum since last year after a long period of time, when it was growing at a rate of just 2 – 3%. This is mainly due to an increase in consumer spending in the last one-year & the low interest rates. The Federal Reserve has increased interest rates by 100 basis points in the last 6 months to counter inflation & to cool down the over heated economy. The unemployment rate is down to 3 – 4% & the output is growing. The USD is at its all time high against all the major currencies of the world. The US Balance of payments continues to be negative & is being financed by the inflow of capital into the country as foreign investors & governments continue to hold Greenbacks. The stock markets are on an up trend with DJIA gaining handsomely in the last one month (with few small falls). Fed’s chairman Alan Greenspan calls "the rise in the stock market & its relationship to the increase in the consumer spending" as the key element behind dollar’s prosperity.

The US economy also has its share of problems. Softness in a number of manufacturing industries & a weakness in many foreign economies has reduced exports from US & intensified competition from imports. Capital gains have taken more prominent role in driving the US economy. As a consequence, a flattening of stock prices could slow the growth of spending, and a decline in equity prices, especially a severe one, could lead to a considerable weakening of consumer demand.

Future Prospects

So, the million-dollar question for US economy is "How much longer will the rise in US stocks continue?" Not much, Greenspan opines. This is because despite increased demand & productivity, corporate profits have fallen in recent past & therefore, the rising stock prices are not justified. So, whether this sparkling performance will continue or not, is yet to be seen with a lot depending upon the markets.

After almost 2 years of the economic crisis in South East Asia, we can see more clearly the roots of the crisis & way forward for the region. The short-run phase, characterized mainly by financial panic, is coming to an end, and some early signs of recovery are already evident in South Korea and Thailand. The medium-term phase will involve a considerable amount of financial restructuring, as the region digs its way out of a mountain of bad debts. The long-run phase, however, may be the trickiest. Over the next few years, East Asia will need a significant upgrading of a range of social institutions--extending from politics to higher education, to science and technology--if the region is to re-establish rapid growth in the years ahead.

At the epicenter of the crisis, we now know, was a remarkable panic of foreign investors. As the world's most successful developing region, South East Asia was able to attract several hundred billion dollars of international bank loans in the first half of the 1990s. Most of this money that was coming in was short – term in nature. The short-term debts borrowers in the region owed vastly exceeded the level of liquid foreign-exchange reserves.

When the international banks started to sniff trouble in 1996, with overvalued currencies, weakening exports, and over - capacity, these banks began to reduce their lending. After the devaluation of the Thai Baht in mid-1997, they started to flee. The financial market liberalization in East Asia in the early 1990s was the trigger for the huge inflows of capital. The markets were opened in just the wrong way. Restrictions were kept on long-term capital inflows (such as foreign ownership of Asia's domestic banks), while short-term inflows were encouraged. Both the lenders and the borrowers dug their own graves. At the very core of the problem was the difficulty of achieving efficient GDP growth of 8% per year on a continuing basis.

Future Prospects

But things have started to look up for the region, since then. Starting with the proximate cause of the crisis, financial panic, the worst is over. The panicked flight of capital has ended. Short-term debts have been repaid, rescheduled or defaulted upon. This is the secret of the rebound in exchange rates and lowering of interest rates in East Asia in recent months. Without panic, asset prices have returned to reasonable levels. The financial wreckage, however, still lies strewn around the region. Bad debts are everywhere, and must be written down. The trick here will be compromise and speed.

With regard to corporate debts, foreign investors are simply going to have to split the difference with Asian enterprises, getting partial repayments rather than holding out for a complete takeover of domestic enterprises.   The greatest challenges to long-term Asian growth, however, probably lie elsewhere. East Asia will restore its competitiveness in world markets only if the investments in social software are now given their due priority. Most of Southeast Asia is deficient in higher education, science and technology, and the quality of political institutions. There are no easy short cuts to improved science and technology. Foreign direct investments can make a difference, by bringing technology from the advanced economies. But FDI can't substitute for local scientific talent, which must be developed. Once that is done & proper financial controls are in place, the South East Asia will again experience the same boom.

Euro Economy

The European economy was in a bad phase until sometime back. The expectations from Euro have sunk with Euro hitting all – time lows against the USD. The USD continues to rise on back of sparkling economic performance this year. The growth rate in the region was a mere 2.3% till the third quarter of 99. But since then it has picked up & touched 3% confirming that Euroland recovery is underway. There was steady fourth-quarter growth in all the major Euroland economies. Growth has also picked up outside Euroland, with the UK, Sweden and Greece all expanding at or above a 3% annual rate. Inflation rose to 2.1% in March 2000, slightly above the European Central Bank target range of 0-2%. Perhaps more worryingly, there is a growing disparity between inflation rates across the Euro zone.

Interests rates are pretty high as compared to Euroland standards & recently the European Commercial Bank had hiked the interest rates in the region. The weakness of the Euro means that monetary conditions remain very loose by historic standards in Euroland. This should support the continued recovery of the economy but might also put some upward pressure on inflation.

Future Prospects

Short-term prospects for the Euroland economy have improved markedly over the past year. Average GDP growth looks likely to be around 3 to 3.5% in 2000. This should be consistent with only a modest increase in inflation, given current excess capacity in Euroland, and probably also with some recovery in the Euro against the dollar if the US economy slows over this period. On the other hand, there is also now a real possibility that Euroland growth - helped also by strong recoveries in the UK and Asia - could turn out to be as high as 4% in 2000. This, however, could pose a threat to the European Central Bank's 2% inflation target ceiling and so prompt larger interest rate rises. Nonetheless, opportunities clearly now exist for Europe to break out of the relatively low growth/high unemployment trap that it has been in for much of the last decade.