Table 1. Overview of the Baseline
Projections
(Annual percent change unless otherwise noted)
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Difference from October
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Current Projections
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2001 Projections1
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1999
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2000
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2001
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2002
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2001
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2002
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World output
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3.6
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4.7
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2.4
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2.4
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-0.2
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-1.1
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Advanced economies
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3.4
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3.8
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1.0
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0.8
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-0.3
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-1.3
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Major advanced economies
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3.0
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3.4
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0.9
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0.6
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-0.2
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-1.3
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United States
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4.1
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4.1
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1.1
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0.7
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-0.3
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-1.5
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Japan
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0.8
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1.5
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-0.9
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-1.3
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-0.4
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-1.5
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Germany
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1.8
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3.0
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0.7
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0.8
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-0.1
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-1.0
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France
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3.0
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3.4
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2.0
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1.3
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—
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-0.8
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Italy
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1.6
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2.9
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1.8
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1.2
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0.1
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-0.8
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United Kingdom
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2.1
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2.9
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2.3
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1.8
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0.2
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-0.6
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Canada
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5.1
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4.4
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1.4
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0.8
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-0.5
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-1.4
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Other advanced economies
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4.9
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5.2
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1.4
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1.9
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-0.4
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-1.4
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Memorandum
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European Union
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2.6
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3.4
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1.7
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1.4
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-0.1
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-0.8
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Euro area
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2.7
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3.5
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1.6
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1.3
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-0.2
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-0.9
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Newly industrialized Asian economies
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7.9
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8.2
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0.3
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1.7
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-0.7
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-2.5
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Developing countries
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4.0
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5.8
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4.0
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4.4
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-0.4
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-0.9
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Africa
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2.5
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2.8
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3.5
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3.6
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-0.3
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-0.8
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Developing Asia
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6.1
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6.8
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5.6
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5.6
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-0.2
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-0.5
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China
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7.1
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8.0
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7.3
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6.8
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-0.2
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-0.3
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India
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6.8
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6.0
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4.4
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5.2
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-0.1
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-0.5
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ASEAN-4 2
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2.8
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5.0
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2.1
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2.9
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-0.2
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-1.2
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Middle East, Malta, and Turkey
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2.0
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5.9
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1.7
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4.0
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-0.6
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-0.7
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Western Hemisphere
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0.1
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4.1
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1.1
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1.7
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-0.6
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-1.9
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Brazil
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0.5
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4.4
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2.0
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2.0
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-0.2
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-1.5
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Memorandum
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Sub-Saharan Africa
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2.5
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2.9
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3.1
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3.4
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-0.4
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-0.8
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Heavily indebted poor countries3
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3.8
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3.7
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3.8
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4.5
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-0.5
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-1.1
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Countries in transition
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3.6
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6.3
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4.7
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3.9
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0.7
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-0.2
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Central and eastern Europe
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2.0
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3.8
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3.0
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3.3
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-0.5
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-0.9
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Commonwealth of Independent
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States and Mongolia
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4.6
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7.8
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5.9
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4.3
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1.4
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0.3
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Russia
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5.4
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8.3
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5.8
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4.2
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1.8
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0.3
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Excluding Russia
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2.8
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6.8
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6.1
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4.3
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0.7
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0.2
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World trade volume (goods and services)
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5.4
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12.4
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1.3
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2.6
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-1.4
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-2.6
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Commodity prices (in U.S. dollars)
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Oil 4
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37.5
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56.9
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-11.4
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-16.0
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-6.4
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-7.4
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Nonfuel (average based on world commodity
export weights)
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-7.0
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1.8
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-5.1
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1.7
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-2.5
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-2.8
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Consumer prices
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Advanced economies
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1.4
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2.3
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2.4
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1.4
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-0.1
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-0.3
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Developing countries
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6.8
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5.9
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6.0
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5.2
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—
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0.1
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Countries in transition
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43.9
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20.1
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16.5
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11.0
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0.1
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0.3
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Six-month London interbank
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offered rate (LIBOR, percent)
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On U.S. dollar deposits
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5.5
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6.6
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3.8
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2.8
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-0.3
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-0.9
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On Japanese yen deposits
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0.2
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0.3
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0.2
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0.1
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—
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—
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On euro deposits
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3.0
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4.6
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4.1
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2.9
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-0.2
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-1.0
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Memorandum
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World growth based on market
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exchange rates
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3.0
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3.9
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1.3
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1.2
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-0.3
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-1.2
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Note: Real effective exchange rates
are assumed to remain constant at the levels prevailing during September
17-October 16, 2001.
1Using updated purchasing-power-parity (PPP)
weights, summarized in the Statistical Appendix, Table A.
2Includes Indonesia, Malaysia, the
Philippines, and Thailand.
3The 42 countries eligible for HIPC assistance
from the Fund's program for Highly Indebted Poor Countries for
whom data is available.
4Simple average of spot prices of U.K. Brent,
Dubai, and West Texas Intermediate crude oil. The average price
of oil in U.S. dollars a barrel was $28.21 in 2000, the assumed
price is $25.00 in 2001, and $21.00 in 2002.
11/13/2001
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- Among the industrial economies, the United States is
now expected to experience a mild recession in the second half of 2001,
followed by a recovery which strengthens through 2002, supported by
the substantial macroeconomic stimulus in the pipeline, a gradual recovery
of confidence, and the end of the inventory correction. As a result,
real GDP growth in 2002 is now projected at 0.7 percent, 1.5 percentage
points lower than projected earlier, while growth in Canada has
been marked down significantly, in line with developments in the United
States. Projections for the euro area have also been reduced,
especially for Germany, reflecting recent data indicating a weaker-than-expected
situation before the September 11 attacks as well as the aftermath while
in the United Kingdom growth is expected to remain relatively
resilient, buoyed by domestic demand growth and the easing of monetary
policy. The outlook for Japan has become increasingly worrying,
and the economy is now expected to experience two consecutive years
of contraction for the first time in the post-war period.
- Among emerging market countries, the impact of recent events
varies widely, depending on the structure of the economy and the strength
of economic fundamentals:
- For the Western Hemisphere, GDP growth in 2002 has
been revised down by 1.9 percentage points to 1.7 percent,
because of the deterioration in external financing conditions, which
has seriously affected a number of countries in the region, and
weaker external demand for goods, including the downturn in tourism,
which has particularly affected many central American and Caribbean
countries. Lower oil prices have lessened financing requirements
for many countries, including those suffering from declines in the
prices of other commodities, while further weakening the outlook
for net oil exporters.
- In emerging Asia, growth is expected to remain reasonably
robust in China and to a lesser extent India, which
are less exposed to external developments. Elsewhere, notwithstanding
increased policy stimulus and the generally beneficial effect of
lower oil prices, growth has been marked down sharply owing to weakening
external demand together with the further deterioration in the IT
sector (which has particularly affected a number of the newly
industrialized economies).
o In the Middle East, growth will be adversely affected
by lower oil prices, and in some cases weaker remittances and
tourism revenues, reflecting both the fallout from the September 11
events and the worsened security situation in the region. In Turkey,
the outlook has been affected by weaker external demand, especially
for tourist services, and more difficult financing conditions,
while domestic real interest rates remain extremely high.
- In the transition economies, the impact of recent events
is expected to be relatively moderate. Indeed, although slowing
compared to 2000, growth in Russia has been revised upward
for both 2001 and 2002, buoyed by relatively strong domestic
demand. Growth in central and eastern Europe is also expected to
remain reasonably resilient, partly owing to the benefits of lower
oil prices.
- The poorest countries are being hurt by weaker external demand
and weakness in prices of commodities, with oil exporters particularly
affected. Nonfuel commodity exporters will also be affected by further
weakness in already depressed prices, especially for agricultural commodities,
although the benefits from the lower cost of oil imports will help limit
the increase in external financing requirements. On the macroeconomic
side, while growth is projected to be relatively well sustained for
the group as a whole—not least, because a number of countries are
benefiting from the cessation of armed conflicts—this masks wide
differences in the outlook for individual countries. Moreover, the aggregates
may understate the impact on poverty, as lower prices for agricultural
goods will hurt rural areas, where most of the poor live, while the
benefits of lower oil prices tend to accrue in urban areas.
With substantial policy stimulus in the pipeline, there is a possibility
that recovery in 2002 will come more rapidly than presently expected.
However, given the already difficult situation for the global economy,
the major policy issue at the current juncture is clearly the possibility
that a worse outcome could occur. In this context, I would focus on four
key areas of risk:
- Confidence and activity in the United States may pick up more
slowly than presently expected, for instance if the effects of the
terrorist attacks themselves prove more prolonged, or if recovery is
hampered by the imbalances accumulated in the past, including over-investment
and consumers' relatively high indebtedness, particularly given higher
interest rates for risky borrowers. In addition, there are also downside
risks to activity in the other major currency areas. With no
major region providing substantive support to activity, further weakness
in any one would reinforce the already synchronized downturn, with consequences
that would be difficult to predict given the progressively stronger
and more complex economic and financial linkages across countries. This
could likely result in a greater and more prolonged withdrawal from
risk taking in financial markets, as well as lower commodity prices,
both of which would adversely affect developing countries.
- The outlook for emerging market countries depends critically on
how long global risk aversion remains elevated and bond issuance is
basically limited to only high grade borrowers, as well as the extent
of the squeeze generated by refinancing pressures in the meantime.
Recent declines in global interest rates have helped limit the increase
in borrowing costs, and—with dedicated emerging market investors
holding extremely large cash cushions—there is technical support
for the market. However, bond markets—historically the largest
source of external financing for emerging markets—are essentially
closed for many countries, and financing pressures could become significantly
larger and more widespread, particularly if the global outlook deteriorates
further, or credit event concerns worsen.
- The financial imbalances in the global economy remain an important
source of risk. Mature equity markets appear to be pricing in a
relatively rapid recovery; however it remains unclear whether
asset markets have fully priced in the deterioration in corporate credit
quality and earnings prospects that has occurred thus far. Currency
options market data suggest that expectations of a sharp depreciation
in the U.S. dollar have not increased since the attack, partly
reflecting a lack of financial market confidence in Europe's ability
to decouple from the present slowdown in the United States. However,
an abrupt adjustment in either market remains possible, particularly
if the global growth outlook were to prove worse than expected, especially
given the recent reduction in market liquidity—notably for credit
swaps and derivatives—and the financial difficulties faced by some
major market participants, including insurance companies.
- Slowing growth and a flight to quality in financial markets would
increase pressure on corporate and financial sectors across the globe.
This is of particular concern in Japan, where banks are highly exposed
to developments in equity and bond markets, but may also become more
important in other countries in Asia and Latin America.
The long-term influence of the terrorist attacks on the global economy
is also difficult to determine. Productive potential could be reduced
by higher "transactions" costs associated with more uncertainty,
such as greater spending on security, higher insurance premiums, and more
stringent checks of traded goods. For this reason, it will be essential
to resist protectionist pressures, which are often aggravated by a slowing
of economic activity. That said, and while acknowledging the possibility
of a lasting adverse impact on the global economy, I would align myself
with the widespread view that the impact on long-term growth potential
is likely to be reasonably small.
In summary, the global economy was already slowing prior to the events
of September 11. The aftermath has led to a further deterioration
in the short-term global outlook, added to the difficulties faced by a
number of emerging market countries, and mat well have an adverse impact
on the poor. Partly because of the strong policy response since the attacks,
however, the economic effects may be reasonably brief, with recovery beginning
around the middle of next year. However, major uncertainties and risks
continue, and there remains a concern that a measurably worse outcome
could occur—including significant further external financing pressures
in emerging markets and other developing countries. It is essential in
this environment to strengthen confidence. As discussed in more detail
in my October 5 statement, this underscores the need for policies
among the major industrial countries, on which the outlook for global
growth primarily depends, to be proactive; for emerging market and developing
countries to support activity while recognizing that there will be little
market tolerance for weak fundamentals; and, last but not least, for a
coordinated and collaborative response by the international community,
including the Fund. I look forward to a positive outcome at the WTO Ministerial
meeting in Doha and a rapid initiation of a new trade round, as a key
element in a strategy for boosting confidence and reinforcing global growth
prospects.
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