CESifo WORLD ECONOMIC SURVEY

WORLD ECONOMIC CLIMATE

ECONOMIC EXPECTATIONS

INFLATION

INTEREST RATES

CURRENCIES

SPECIAL TOPIC

World Economic Climate remains ina cooling-down phase

Assessments of current economic situation and expectations both somewhatweakened but still positive

Stable rate expected

Trend of moderately rising rates expectedto continue

Euro still seen as clearly overvalued

World Trade Negotiations

MAY 2005VOLUME 4, NO. 2

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Regions

Q World economy: Renewed deterioration from a still favourable level

Q Western Europe: Lacklruste development continues

Q North America: Cautious expectations

Q Eastern Europe: Growing markets

Q CIS: Economic upturn remains strong

Q Asia: Dynamic economies

Q Oceania: Economic cool-down

Q Latin America: Economic stabilization

Q Near East: Economic climate remains favourable

Q Africa: Diverging economic trends predominate

Ifo World Economic Survey

May2005

WES is conducted in co-operation with the International Chamber of Commerce (ICC)in Paris and receives financial support from the European Commission.

Notes

The Ifo World Economic Survey (WES) assesses worldwide economic trends by polling transna-tional as well as national organizations worldwide about current economic developments in the re-spective country. This allows for a rapid, up-to-date assessment of the economic situation prevailingaround the world. In April 2005 some 1,118 economic experts in 91 countries were polled.

WES is conducted in co-operation with the International Chamber of Commerce (ICC) in Parisand receives financial support from the European Commission.

Methodology and evaluation technique

The survey questionnaire focuses on qualitative information: on assessment of a country’s generaleconomic situation and expectations regarding important economic indicators. It has proved to bea useful tool, since economic changes are revealed earlier than by traditional business statistics.

The individual replies are combined for each country without weighting. The “grading” procedu-re consists in giving a grade of 9 to positive replies (+), a grade of 5 to indifferent replies (=) anda grade of 1 to negative (–) replies. Grades within the range of 5 to 9 indicate that positive answersprevail or that a majority expects trends to increase, whereas grades within the range of 1 to 5 re-veal predominantly negative replies or expectations of decreasing trends.

The survey results are published as aggregated data. The aggregation procedure is based on coun-try classifications. Within each country group or region, the country results are weighted accor-ding to the share of the specific country’s exports and imports in total world trade.

CES – Center for Economic Studies – is an institute within the department of economics of Lud-wig-Maximilians-University. Its research concentrates on public finance, aspects of the economy,but also includes many diverging fields of economics.

Ifo Institute for Economic Research ist one of the largest economic research institutes in Ger-many with a three-fold orientation: to conduct economic research, to offer advice to economicpolicy-makers and to provide services for the research and business communities. The Ifo Insti-tute is internationally renowned for its business surveys.

CESifo is the name under which the international service products and research results of bothorganizations are published (in English).

WES 2/20053

In April 2005 the World Economic Climate deterio-

rated for the fifth time in a row (see Figure 1).

However, the climate indicator is at 97.5 (after 101.1

in January; 1995=100), still considerably higher than

its long-term average (1990–2004: 94.0). Both compo-

nents of the economic climate index – current eco-

nomic situation and expectations for the coming six

months – have been downgraded somewhat (see

Figure 2) though still remaining positive.

World economy: Renewed deterioration from a still favourable level

The steep path of global economic growth over thelast two years was part of a cyclical recovery thatreached its peak in mid-2004 (see Box 1). Lastyear, the world economy grew, according to IMFfigures, by around 5 percent, its fastest rate foralmost thirty years, led by very high growth inChina and other Asian countries as well as in thebiggest economy of the world, the USA, and theeconomic revival of Japan. By the end of 2004, theeconomic cycle of the world economy had alreadyentered a cooling-down phase. According to thelatest WES results, growth is expected to slowdown further in the coming months. However,though assessments of the current economic situa-tion as well as economic expectations for the sec-ond half of 2005 have been downgraded by expertssurveyed in April, the changeis expected to result only in »asoft patch« and not in a sharpdownturn, as most determi-nants of the short-termprospects remain positive.

The main driving forces behindthe movements in the world eco-nomic climate index are the fourmain economies: the United

States, the euro zone, Japan andChina. The climate indicator fellmost clearly in the euro zone,remaining below its long-termaverage. In Asia, the assessmentsof the present economic situa-

tion deteriorated, while the economic expectationsimproved over the January survey, resulting in an evenslightly higher overall climate index. This patternreflects also the current economic business sentimentsin the two biggest economies of the region – Japan andChina. In contrast, in the US the climate index slightlydeteriorated due to somewhat less optimistic expecta-tions for the coming six months whereas the currentbusiness situation received somewhat more favourableassessments compared to the January figures. For theworld economy as a whole, the growth is expected tocontinue in the coming six months but at a slower pace.However, the expansion may be endangered by seriousimbalances in the world economy such as the huge US

current account deficit, weak growth in the euro zone

and Japan, and inflexible currency regimes in Asia, e.g.in China.

Western Europe: Lacklustre development continues

Growth in Western Europe has lagged behindAmerica and most other countries for a long time.According to the panel’s responses this trend willcontinue also in coming months (see Figures 3 and4). The overall economic climate indicator slippedagain in April, resulting from both less positiveassessments of the present economic situation aswell as somewhat less optimistic expectations for thecoming six months.

WORLD ECONOMY:WORLD ECONOMIC CLIMATE REMAINS

IN A COOLING-DOWN-PHASE

Figure 1

WES 2/2005 4

The decline of the overall climate index is mainlydue to the big three euro zone countries Germany,

France, and Italy, where experts forecast only aweak growth for 2005. The six leading German eco-nomic research institutes in the last April week cuttheir forecast for Germany’s growth in 2005 from1.5 percent to just 0.7 percent. In the euro area, onlyWES experts in Finland and Ireland judged the cur-

rent economic performanceabove the satisfactory level andin Austria and Spain as satisfac-tory. In the other countries ofthe euro area the economic situ-ation, according to WESexperts, is still on a rough road.In Greece and Belgium, theassessments of the economic sit-uation deteriorated somewhatbut remained in the favourablezone. Not so in Portugal and theNetherlands, where the panel’sresponses still show no clearevidence of an economic recov-ery. Unemployment clearlyranks as the economic problemnumber one in the euro zone,closely followed by insufficientdemand. Further risks for a turnto the better from the long-last-ing weak growth trend lie in apossible setback of the Ameri-can and Asian economies, asso-ciated with a sharp decline inthe value of the dollar. Thiswould seriously damage theEuropean export industry andthereby deprive the euro zone

of the single source of strength it has had until now.However, this scenario appears not very likely toWES experts. Economic expectations for the com-ing six months have been only slightly downgradedin the euro area and remained still generally posi-tive (see Figure 4).

Also in the European countries outside the euroarea, the economic climateslightly deteriorated, but from aquite favourable level. Only inDenmark the assessments of thepresent economic situation con-tinued to improve, while inSweden, the United Kingdom,

Norway and Switzerland theassessments of the current eco-nomic situation have been slight-ly downgraded though remain-ing well above the satisfactorylevel. Moreover, experts sur-veyed by WES in these countriesare generally positive concern-ing the short-term prospects.

Figure 2

WES 2/20055

North America: Cautious expectations

According to the latest survey results, the economic

climate indicator in North America deteriorated

slightly in April (see Figures 3 and 4). In both

economies of the continent – the US and Canada – the

deterioration of the climate index was a result of more

cautious expectations, while theassessments of the current econo-mic situation remained at a veryfavourable level in both countries.The reason for the cautious ex-pectations may lie in the US in therecord levels of the current ac-count deficit, increased privatesector debt burden and low pri-vate saving rates.

In Canada WES experts namedas economic problem areas “lackof international competitive-ness” and “trade barriers toexports”; these factors may havecaused the downward revision ofexpectations.

Eastern Europe:Growing markets

On 1 May 2004 ten countriesjoined the European Union, eightof them from Eastern Europe:Poland, Hungary, Czech Re-

public, Slovakia, Slovenia, Es-

tonia, Lithuania and Latvia. Nowthat the Eastern European coun-tries have become a part of theEU they have bolstered overalleconomic growth and havebecome a bright spot for Europe.In April 2005, the overall econom-ic climate in Central and EasternEurope increased slightly, withthe assessments of the currenteconomic situation improving fur-ther and the economic expecta-tions for the coming six monthspointing further upward (seeFigure 4 and Figure 8).

In all the eight new EU membersthe present economic situation

was again rated above the satisfactory level in April.However, these assessments deteriorated somewhatcompared to the January poll in some of the strongesteconomies in the region – Latvia, Poland andSlovenia – according to WES experts. The forecastsfor the coming six months point to further economicimprovement in all new EU member states.

Figure 3

WES 2/2005 6

In the Eastern European countries outside the EU,

economic trends observed in April differ. In Albania

and Romania they point to a continuation of the

recovery. The present economic situation was

assessed as above satisfactory, and economic expec-

tations remained fairly positive, particularly in

Romania. In Croatia and Bulgaria the present eco-

nomic situation was seen positively too, but received

slightly lower marks than in the January survey. The

overall economic situation in Serbia and Montenegro

still gives cause for concern, but the near-term

prospects remained positive.

CIS: Economic upturn remains strong

The economic upturn in Russia continues, according to

the recent WES results. After a slight deterioration of

business confidence since mid 2004, the economic cli-

mate indicator in Russia rose inApril, with both the assessment ofthe current economic situationand economic expectations point-ing upward.As a present econom-ic weak point, experts namedagain “lack of international com-petitiveness”, which is seen as animportant problem also inUkraine, where WES expertsreported a favourable economicclimate as well. The expectationsconcerning future developmentpoint here to further stabilisationat the current “satisfactory” level,with higher forecasts for privateconsumption, capital expenditureand exports. A highly favourableeconomic climate has beenreported again for Kazakhstan.

With regard to the future eco-nomic development, the partici-pants are fairly confident.However, as in Russia, much ofthe growth in one of the fastestgrowing CIS economies has beenfuelled by oil production and isnot widespread over the wholeeconomy. Thus, high unemploy-ment remains one of most impor-tant economic problems in thecountry, according to WESexperts.

Asia: Dynamic economies

The Asian region is economically the most dynamicin the world. In April 2004, the economic climateindex in Asia reached an all-time high (see Figure 3).However, at the end of 2004 and in January 2005 theeconomic climate index deteriorated in succession,mostly reflecting an economic cooling-down inJapan. According to the April 2005 survey results,the overall climate index improved slightly, on aver-age, for the Asian countries surveyed by WESexperts (see Figure 3). While the assessments of thepresent economic expectations deteriorated againslightly, economic expectations for the second half of2005 have improved in most cases.

The experts surveyed in China again assessed the pre-sent economic situation as above satisfactory though

Box 2World Economic Survey (WES) and GDP Growth in the Euro Area

The Ifo World Economic Climate for the 12 member countries of the euro areais the arithmetic mean of the assessments of the general economic situationand the expectations for the economic situation in the coming six months. TheApril results are based on the responses of 294 experts. As a rule, the trend ofthe Ifo Economic Climate indicator correlates well with the actual business-cycle trend for the euro area – measured in annual growth rates of real GDP(see Figure). The Ifo indicator for the economic climate in the euro zone fell again in April2005. Especially the assessments of the current economic situation deterioratedagain, but also the expectations for the next six months continued to worsen.The gap between the economic climate in the euro zone to that of the rest ofthe world has grown wider. This is an indication that the economic weakening inthe euro area will persist for the time being.Within the euro area, only in Ireland and Finland was there an improvement ofthe already very positive assessments of the current economic situation. Fromthe other euro countries, a downgrading of the current economic situation wasreported, particularly from Italy, Portugal, Germany and France. While inmost euro countries at least a slight strengthening of economic growth in thecourse of the next six months is anticipated, the opposite holds for Spain and Greece: In these two countries the WES experts expect an economic slowdownin the next half year of the currently on the whole quite satisfactory economicsituation.

WES 2/20057

Figure 4

SELECTED REGIONS

WES 2/2005 8

at a considerably lower level than one year ago.China’s high proportion of exports to the US wouldmake the economy vulnerable to any economicdownturn in North America. However, the overalleconomic expectations for the Chinese economy in2005 are judged by WES experts as generally positive.While the country’s economy has experienced extra-ordinary economic growth over the past decade sinceDeng Xiaoping started to liberalise China’s economy,the Japanese economy has been stagnating for morethan a decade, with growth rates even lower than inthe euro zone. But in 2003 and 2004 after many yearsof economic stagnation Japan has been gainingstrength. However, in 2005 the economy seems tohave left the new growth path. The assessments of thecurrent economic situation deteriorated for the sec-ond time in succession after two years of continuousimprovement. And also the country’s outlook for allof 2005 is cautious, according to WES experts.

Despite a slight deterioration of the climate index,India retained the leading position with regard to busi-ness confidence in Asia, and its economic growth out-look for 2005 remained buoyant. According to sur-veyed experts India’s economy will expand at the rateof seven per cent in the current year thanks toincreased output in both agriculture and industry.However, especially India’s agriculture, which makesup a quarter of the economy and provides livelihood tothree-fifths of the country’s 1.1 billion people, is depen-dent on the four-month monsoon rains that will start inJune, with wide-ranging implications on other econom-ic sectors. An improved economic situation has beenreported by WES experts in Hong Kong; the overalleconomic climate index remained on a very favourablelevel. In South Korea, the marks for the current eco-nomic situation, though not yet having reached the“satisfactory” level, improved compared to the Januarysurvey. And the economic expectations point to stabili-sation in the course of the next six months. InBangladesh, Indonesia, Malaysia, Pakistan, Thailand,

Singapore and Vietnam the present economic perfor-mance is seen as satisfactory and is expected to remainon the upward trend in 2005. Sri Lanka and thePhilippines were the only countries in the Asian regionwhere experts assessed the overall economic situationas below the satisfactory level and the near-term expec-tations of the surveyed experts remained cautious.

Oceania: Economic cool-down

Oceania has topped the list of economic perfor-mance for almost five years. In the April survey the

assessments of the present economic situation inAustralia were strongly downgraded. The overall cli-mate index shows that growth is slowing in the Asia-Pacific region’s fifth-largest economy. However, thepresent economic situation in Australia is stillassessed above the satisfactory level and the eco-nomic forecast suggests that Australia’s economywill remain strong over the current year, althoughgrowth is expected to slow.

The New Zealand economy, which is dominated byforestry, agriculture and tourism, grew at the fastestpace in four years in 2004, buoyed by surging con-struction and high prices for its agricultural exports.However, the economic outlook here too is subjectto uncertainty, though the current economic situa-tion has been assessed very positively for more thantwo years.

Latin America: Economic stabilisation

According to the latest survey results, the economicclimate deteriorated somewhat in Latin America inApril. Both the assessments of the current economicsituation and economic expectations have beenslightly downgraded since the January survey (seeFigure 4). However, robust local demand and busi-ness investment are expected to help the region toremain on its strong economic course in 2005.

The slight deterioration of the economic climate, onaverage, of countries surveyed in the region mainlyresults from less positive marks for the present eco-nomic situation in Brazil, Chile, Colombia, Paraguay

and Uruguay. However, the economies in Argentina,

Venezuela and Uruguay have shaken off deep reces-sions, helping brighten the region’s outlook. InMexico the current economic situation was againregarded as fully satisfactory. In 2004 Mexico grew at4.4 percent, the fastest pace in four years and theinflation rate in 2005 will drop to 4.6 percent, accord-ing to WES experts.Also other forecasts suggest thatthe country will maintain macroeconomic stability in2005. In El Salvador, Panama and Peru the currentbusiness confidence remains still strong, while inCosta Rica, Ecuador, Paraguay, Bolivia andVenezuela the assessments of the present economicsituation have not yet reached the satisfactory level.The expectations regarding economic growth for thenext six months have also been downgraded some-what but remained generally optimistic in the major-ity of other countries surveyed by WES experts (see

WES 2/20059

Figure 5

ACTUAL SHORT-TERM INTEREST RATES AND EXPECTED TREND

FOR THE NEXT 6 MONTHS (QUARTERLY DATA)

WES 2/2005 10

Figure 10). Only in Bolivia, Costa Rica, Ecuador andParaguay has the outlook for 2005 become cloudyaccording to WES experts.

Near East: Economic climate remains favourable

The economic climate continues to be highlyfavourable, on average, for the countries covered byWES in the Near East region. Both the assessmentsof the current economic situation as well as the near-term expectations are very positive (see Figure 11).

According to the panel’s responses, the current eco-nomic situation in Iran, Bahrain, Kuwait, Jordan, Saudi

Arabia and the United Arabian Emirates remainedfavourable.The assessments of economic performancein April were above the “satisfactory” level in all thesecountries. The forecast for the coming six monthspoints to a positive development. According to WESindicators, the economy in Israel is also reboundingfrom recession very strongly. Analysts are confidentconcerning further economic stabilisation. Despite theeconomic turnaround, unemployment is ranked asproblem number one in the economy. Further eco-nomic recovery prospects are closely linked to thepeace process in the Near East.

The economy in Turkey demonstrated strong growthover the past three years. The country’s GDPexpanded by about 10 per cent in 2004, making itseconomy one of the world’s fastest-growing.However, in 2005 the country’s economic climatedeteriorated somewhat. Both the assessments of thepresent economic situation as well as near-termexpectations received slightly lower marks than atthe end of 2004. Unemployment, foreign debts and

public deficits remain crucial challenges for the near-term future. Also in Lebanon, the economic climateworsened in April. Lebanon was plunged into apolitical crisis after the February 14 assassination offormer Prime Minister Rafiq Hariri, leading to hugeprotests in the country. However, WES experts pro-ject economic recovery in the second half of 2005.Also private consumption is expected to pick up anda rebound in corporate investments is foreseen.

Africa: Diverging economic trends predominate

Africa remains a region with very diverging eco-nomic trends. Thus, an aggregated climate index forcountries surveyed by WES on this continent makeslittle sense, and the following analysis will focus onparticular economic trends in individual countries.

In South Africa (see Figure 11) the economy hasexperienced steady growth over the past decade.The economic climate indicator continuouslyimproved during 2004. In the beginning of 2005 theoverall climate index deteriorated slightly due toless optimistic expectations. However the country’seconomic performance has been assessed above the“satisfactory” level. Private consumption willremain resilient in the course of the coming sixmonths. “Unemployment”, on the one hand, and“lack of skilled labour”, on the other, are seen byWES experts as the most important economic prob-lems in the country, and AIDS remains the mostserious social problem, as on the African continentin general.

The Egyptian economy is still facing economic hard-ship. The overall economic situation is assessed far

below the “satisfactory” level.But optimism prevails in theforecasts for the second half ofthe year. Similarly in Nigeria

and Algeria the present eco-nomic situation has been alsoassessed as “bad”, but the nearterm expectations raise hopesfor betterment. Not so inKenya, Cote d’Ivoire andZimbabwe where WES expertsdon’t expect considerableimprovement of the presentlow economic performance inthe coming six months. InMauritius, Morocco and

Figure 6

WES 2/200511

Tunisia the present economic situation was assessedas satisfactory. However, the surveyed experts arestill concerned whether these economies will main-tain a stabilisation course for the rest of 2005.

No change of inflation rate in 2005

On the world-wide average consumer price inflation(CPI) in 2005 is expected to stay at 2.9 percent,which is exactly the rate registered in 2004.However, compared with the inflation estimategiven in the first quarter (2.8 percent) this is a mar-ginal upward revision of expected price increases inthe world.

In the euro area the inflation outlook for 2005 isidentical with the 2004 inflation rate (2.0 percent)and also unchanged from the estimate from the firstquarter of this year. The worst inflation performancein the euro area will prevail again in 2005 in Greece,where the inflation outlook has even worsenedsomewhat (from 3.2 percent to now 3.4 percent), fol-lowed by Spain (3.1 percent). On the other hand thelowest inflation rates in the euro area in 2005 areexpected in Finland (1.4 percent), the Netherlands(1.6 percent) and Germany (1.6 percent). In WesternEurope outside the euro area, expectations for lowinflation rates in 2005 continue to prevail inSwitzerland (1.0 percent after expected 1.2 percentat the beginning of the year), Sweden (1.2 percentafter previously expected 1.5 percent) and Norway(1.4 percent after previously expected 1.3 percent).In the United Kingdom the inflation rate in 2005 willremain very close to the euro area figure (2.1 percentcompared with 2.0 percent).

In the United States inflation in 2005 is expected tocreep up further, probably mainly caused by theweaker US dollar rendering imported goods moreexpensive in dollar terms. With an expected CPI fig-ure of 2.9 percent in 2005 (after a previously expect-ed 2.7 percent) the US inflation rate would be some-what above the 2.5 percent mark that the FED con-siders still acceptable.

In Asia consumer price inflation is expected to slowdown further (2.3 percent after previously expected2.4 percent and an actual inflation rate of 2.6 per-cent in 2004). The expected weakening of inflationis particularly pronounced in India (5.5 percentafter previously expected 6.2 percent) and Vietnam(6.1 percent after previously expected 6.6 percent).

On the other hand, inflation is expected to pick upin Sri Lanka (13.0 percent after previously expect-ed 10.5 percent), in Pakistan (9.0 percent after pre-viously expected 8.0) and in South Korea (3.9 per-cent after previously expected 3.4 percent). InChina inflation expectations for 2005 remainedunchanged at 4.1 percent. In Japan deflationappears to have come to an end, though consumerprices are seen as hardly rising (expected increaseof 0.1 percent; unchanged from estimate at thebeginning of the year).

In Central and Eastern Europe inflation is expectedto slow down further (3.7 percent after previouslyexpected 4.3 percent and 5.1 percent in 2004). Therelatively highest rate of inflation still prevails inSerbia and Montenegro, though also here somemoderation of price increases is in the offing(10.9 percent after previously expected 12.0 per-cent).The lowest rates of inflation are seen in 2005 inthe Czech Republic (2.4 percent), in Lithuania(2.6 percent) and in Poland (2.9 percent).

In the CIS countries inflation in 2005 is seen some-what higher than at the beginning of the year(11.2 percent compared with previously expected10.0 percent). The upward revision results mainlyfrom higher inflation expectations in Russia(11.3 percent after previously expected 10.3 percent)and Ukraine (13.2 percent after previously expected10.5 percent). On the other hand, in Kazakhstan theinflation outlook for 2005 is now even marginallybrighter than at the beginning of the year (6.6 per-cent after previously expected 6.8 percent).

In Central and Latin America inflation in 2005appears to be slightly lower than expected at thebeginning of the year (6.1 percent compared withpreviously expected 6.4 percent). However, this ismainly due to Venezuela where the high inflationrate of last year (22 percent) which originally wasexpected to continue will come down to 19.7 percentthis year.Also in Uruguay inflation in 2005 is expect-ed be come in at a lower rate than expected at thebeginning of the year (6.3 percent after 7.3 percent).On the other hand the inflation outlook in Argentinahas worsened considerably since the beginning ofthe year (12.2 percent after previously expected8.4 percent). Also in Costa Rica and Paraguay infla-tion in 2005 is expected to pick up somewhat morethan foreseen at the beginning of the year (12.7 per-cent compared with 11.5 percent respectively7.6 percent compared to 6.0 percent). In Brazil the

WES 2/2005 12

WES 2/200513

Figure 7a

EUROPEAN UNION

WES 2/2005 14

Figure 7b

EUROPEAN UNION

WES 2/200515

Figure 8

EASTERN EUROPE

WES 2/2005 16

Figure 9

ASIA

WES 2/200517

Figure 10

LATIN AMERICA

WES 2/2005 18

Figure 11

NEAR EAST AND AFRICA

WES 2/200519

WES 2/2005 20

inflation outlook for 2005 remained more or less sta-ble (6.4 percent compared to previously an expected6.2 percent).

Also in Africa inflation is expected to calm downsomewhat in 2005 (9.0 percent after previouslyexpected 10.5 percent and an actual rate of 11.4 per-cent in 2004). This improvement in the inflation out-look is mainly due to Nigeria where the 2005 infla-tion rate is now expected to stand at 13.5 percentcompared with 19.5 percent at the beginning of theyear.Also in Kenya inflation in 2005 will probably besomewhat lower than expected at the beginning ofthe year (10.0 percent after originally expected11.0 percent). The same holds true for South Africawhere inflation in 2005 is now seen at 4.1 percentcompared with 4.6 percent some months ago. InZimbabwe hyperinflation will continue, though notquite as high as last year (170 percent compared with300 percent in 2004). In Tunisia inflation will remaincontained with an expected 2.8 percent in 2005 after2.5 percent in 2004.

In the Near East the inflation rate in 2005 will belower than last year though by not as much asexpected at the beginning of the year (5.6 percentafter previously expected 4.7 percent and an actualrate of 6.2 percent in 2004).Whereas in Iran inflationexpectations were reduced somewhat downwardssince the beginning of the year (16.5 percent com-pared to originally 20.0 percent), the opposite wastrue in the United Arab Emirates where inflation in2005 is now expected to be 4.7 percent after an orig-inally estimated 3.7 percent. In Turkey the inflationoutlook for 2005 remained roughly unchanged(8.4 percent compared with 8.6 percent expected atthe beginning of the year).

In Oceania, in 2005 an inflation rate of 2.8 percent isnow expected; this is only slightly higher than esti-mated at the beginning of the year (2.6 percent). Themoderate upward revision is due exclusively toAustralia (2.8 percent after 2.6 percent) whereas inNew Zealand inflation expectations for 2005remained unchanged at 2.6 percent.

Euro still seen as clearly overvalued

The US dollar was again regarded as undervaluedvis-à-vis the average of the other currencies coveredin the survey. On the other hand the euro and theBritish pound continue to appear to be clearly over-

valued; particularly in the case of the euro the per-ceived degree of overvaluation has even furtherincreased since the last survey in January 2005. TheJapanese yen appeared to most WES experts again asmore or less fairly assessed.This overall picture char-acterises the assessments in most countries.Noticeable exceptions from this general view are inEurope, mainly Norway and Denmark where the US

dollar, the euro and the British pound were seen asovervalued vis-à-vis the own currency; only theJapanese yen was regarded as fairly assessed or evenslightly undervalued. Outside Europe the own cur-rency is judged as generally undervalued – not onlyvis-à-vis the US dollar but also vis-à-vis the euro, theBritish pound and the Japanese yen – in CIS coun-tries (Kazakhstan, Russia, Ukraine), in some LatinAmerican countries (Brazil and Mexico), in someAsian countries (particularly China, Indonesia andMalaysia) and also in Nigeria. On the other hand theown currency is regarded as generally overvaluedcompared to the four main currencies US dollar,

euro, British pound and yen in Serbia andMontenegro, Zimbabwe, Bangladesh and SouthAfrica. However, in South Africa the British pound,which appears to be correctly assessed.

According to the responses to the supplementarysurvey question on the development of currencies,the US dollar is expected to remain more or less sta-ble or continue to decline only marginally in thecourse of the next six months. In contrast to this gen-eral trend the US dollar is expected to fall further inthe course of the next six months vis-à-vis the cur-rencies of Australia, New Zealand, Canada, China,India, Republic of Korea, Malaysia and Taiwan. Onthe other hand the US dollar is expected to rise vis-à-vis the own currency in the course of the next sixmonths in some Eastern European and CIS coun-tries like Albania, Hungary, Poland, Latvia,Lithuania, Serbia and Montenegro, as well in themajority of Latin American and African countries. InAsia, a rising US dollar is expected in coming sixmonths mainly in Bangladesh, Vietnam, Sri Lanka,Pakistan and the Philippines. In the Near East a riseof the US dollar is expected mainly in Iran, Israel,Turkey and also Kuwait.

Interest rates: Trend of moderately rising rates is expected to continue

The trend of rising short-term interest rates isexpected to pick up only moderately in the next six

WES 2/200521

months in the euro area as well as Asia and LatinAmerica. In the USA and also in China the share ofWES experts expecting higher Central Bank ratesis still significantly higher than in most other coun-tries but has not increased further since the last sur-vey. There are only a few exceptions where short-

term interest rates are expected to decline in thecourse of the next six months; amongst these coun-tries are Turkey as well as Eastern European coun-tries like Croatia, Hungary and Slovakia and to alesser degree Poland and Russia.

Also the capital market rates were seen to rise onlymoderately in coming six months. Markedly higherthan in the overall average remained the share ofWES experts expecting rising long-term interest rates

in the USA, Australia, New Zealand, Hong Kong,Singapore, the Philippines, Taiwan, Norway,Argentina, and Chile.

Overall economic growth in 2005 about 3.1 percent

On average of all 91 countries included in the survey,real gross domestic product (GDP in constant prices)in 2005 is expected to be 3.1 percent higher than theprevious year. For comparison: In April last yearworld wide growth was expected to stand at 3.4 per-cent. This only moderate change in growth expecta-tions points to the likelihood of a somewhat weakerbut still robust economic growth in 2005.

However, this presumable weakening of growth isrestricted to Asia (4.1 percent compared withexpected 5.2 percent in April 2004), North

America (3.0 percent compared to last year’sexpectations of 3.6 percent) and Oceania (2.7 per-cent compared with last year’s expectations of3.4 percent). In Western Europe exactly the samerelatively low growth rate as one year ago isexpected in 2005 (1.9 percent). In the otherregions of the world growth is expected to bestronger than foreseen one year ago: In Central

and Eastern Europe 4.4 percent compared to3.8 percent, in CIS countries 6.7 percent comparedto 6.3 percent, in Central and Latin America

4.2 percent compared to 3.3 percent, in the Near

East 5.6 percent compared to 4.2 percent and inAfrica 4.2 percent compared to 3.6 percent.

The expected pick-up of growth in the CIS area ismainly due to even stronger growth than last year inthe Ukraine and in Kazakhstan (in both cases above

8 percent) whereas growth in Russia will slow downsomewhat (from 6.5 percent to 6.0 percent).

In Central and Latin America the presumable accel-eration of growth mainly results from high figures inChile (6.0 compared with 4.3 percent last year),Brazil (3.9 percent compared to 2.9 percent) andVenezuela (6.0 percent compared to 5.1 percent).

In Asia the expected slowdown of growth is causedmainly by Japan (1.2 percent after expected 2.4 per-cent one year ago), by Thailand (5.7 percent com-pared with 6.8 percent one year ago) and Singapore(4.4 percent compared to 5.4 percent one year ago).On the other hand, growth in China is seen about asstrong as last year (around 8.5 percent) and inIndonesia it will increase to 5.8 percent (after4.3 percent last year).

In the Near East the higher growth in 2005 than in2004 is mainly due to a significantly more buoyantgrowth outlook in Saudi Arabia (6.4 percent com-pared to 3.3 percent last year), the United ArabEmirates (7.8 percent compared to 5.0 percent lastyear) and Jordan (6.2 percent compared to 4.5 per-cent last year).

In Africa the expected higher growth in 2005 com-pared to 2004 can be traced back mainly to Nigeria(5.6 percent compared to 4.0 percent last year),Algeria (7.0 percent compared to 5.2 percent), Egypt(4.8 percent compared to 3.7 percent) and SouthAfrica (3.7 percent compared to 2.7 percent).

Thus, Western Europe with an expected 2005growth rate of 1.9 percent, will probably remain theslowest growing region of the world. The Europeangrowth performance is dampened particularly byGermany with expected growth in 2005 of only1.0 percent and by Italy with expected growth of1.2 percent. On the other hand, in Ireland econom-ic growth in 2005 is forecasted to be significantlystronger than expected at the same time last year(5.2 percent compared to 3.5 percent expected atthe same time last year).

ICC Special Question:Multilateral Trade Negotiations

2005 will be a decisive year for the Doha Round ofinternational trade talks and the multilateral trad-ing system. The current round of multilateral trade

WES 2/2005 22

negotiations launched in Doha/Qatar from 9 to 14 November2001 at the 4th WTO MinisterialConference had reached animpasse. Also at the 5th WTOMinisterial Conference in Can-cún/Mexico (from 10 to 14 Sep-tember 2003) participatingcountries could not come to amutual agreement and theround almost collapsed. Themain objective was to agreeupon a time schedule for furtherliberalization of global trade,particularly upon a date for ter-minating of export subsidies indeveloped countries. Negotia-tions have also been haltedbecause of continuing opposi-tion of at least 70 developingcountries to launching negotia-tions on Singapore issues: cre-ation of new rules on trade facil-itation, transparency in govern-ment procurement, investmentsand competition. The decision toprioritize Singapore issues onthe agenda delayed discussionson the core agenda item of theconference: agriculture. The 6thWTO Ministerial Conferencewill be in Hong Kong inDecember 2005. Before thisdeadline, the G8 Summit willtake place at Gleneagles, Perth-shire, Scotland from July 6-8,2005 and bring together theleaders of the world's majorindustrial democracies: Canada,France, Germany, Italy, Japan,Russia, the United Kingdom, theUnited States and the EuropeanUnion to discuss a wide range ofinternational economic, politicaland security issues.

The special question asked in theApril poll focused on the impor-tance of the multilateral tradenegations and containment ofprotectionist pressures world-wide. The question was dividedinto three parts: The first asked

Figure 12

Figure 13

Figure 14

WES 2/200523

about the importance of a successful conclusion of theDoha round in 2006. The second part focused on themeaning of the Doha round for developing countries.And the third part dealt with the climate change andthe role of the private sector in providing economi-cally sound solutions to environmental sustainability.In more detail the questions asked and the answersgiven, were:

A) As the G8 Summit approaches in early July,

should the G8 leaders make it a priority to ensure

trade negotiators in Geneva make enough progress

between now and the ministerial conference in Hong

Kong in December for ministers to lock in that

progress, ensuring the successful conclusion of the

Doha round in 2006?

The vast majority (69 percent) of 945 WES expertspolled in over 90 countries agree that the G8 leadersshould make it a priority that the trade negotiationsmake a considerable progress towards their success-ful conclusion in 2006 (see Figure 12) and about27 percent of surveyed economists strongly agree onthis issue.

B) Will a successful Doha round with meaningful

results in terms of market access for developing

countries make a significant contribution to the

achievement of the Millennium Development Goals

in terms of economic development and poverty alle-

viation?

The increased liberalization of world trade hasincreased the scope of international co-operationand helped raise economic growth in the world andin particular in third world countries. In 2004 devel-oping countries saw their share in world merchan-dise trade rise sharply to 31 percent, the highestsince 1950, according to WTO figures released on14 April 2005.While this trend is encouraging, tradeexpansion is still hampered by barriers. Completingthe Doha Development Agenda round of tradenegotiations would be one major step towardsreducing these barriers. The vast majority (82 per-cent) of 949 of experts polled by WES stronglyagrees or agrees that improved market access fordeveloping countries will make a significant contri-bution to economic development and poverty alle-viation (see Figure 13). However, in several coun-tries experts were skeptical about the positiveimpact of trade on poverty alleviation. The propor-tion of experts doubting a positive effect in thisrespect was high in some countries of EasternEurope, particularly in Slovenia (44 percent),Hungary (29 percent), Albania (25 percent), Poland(22 percent), Estonia (25 percent), Latvia (25 per-

cent) and Lithuania (17 percent). Also in Taiwan(18 percent), France (21 percent), Greece (29 per-cent), Ireland (25 percent), Egypt (25 percent),China (14 percent) and Japan (20 percent), a rela-tively high proportion of surveyed experts disagreeor strongly disagree that open market access fordeveloping countries will make a significant contri-bution to the achievement of the MillenniumDevelopments Goals.

C) Climate change will be an important topic on the

G8 agenda this year. Do you agree that the private

sector, through environmentally-friendly technolo-

gies, will play a major role in providing economically

sound solutions to climate change?

Over the past century temperatures have risen by0.7°C. The overwhelming view of experts is thatwarming has been brought about by the increase ingreenhouse gases in the atmosphere, which in turnhas been caused by human activities – primarily theburning of fossil fuels and deforestation. TheG8 countries account for 47 percent of global CO2

emissions, with the United States, the world's largestemitter of greenhouse gases, refusing to sign up tothe Kyoto Protocol. Consequently, the G8 shouldtake a global lead in proposing solutions to climatechange, and the UK presidency has made climatechange a priority topic in the G8 in 2005. However,according to a majority (88 percent) of 963 the econ-omists surveyed in the WES poll, it will be the pri-vate sector that will provide environmentally-friend-ly technologies and play the major role in economi-cally sound solutions to climate change. However, insome countries experts do not think that solutions toclimate change will be led by business. This propor-tion of experts was particularly high in Egypt(50 percent), Ecuador (43 percent), Poland (43 per-cent), Slovenia (40 percent), Croatia (40 percent),Argentina (33 percent), Bolivia (33 percent), France(32 percent), Russia (30 percent), Czech Republic(30 percent), Kazakhstan (28 percent), Germany(23 percent) and the Netherlands (18 percent).As nocountry will escape global climate change, it is up toboth individual governments and global policy toestablish conditions where innovations with environ-mental-friendly technologies is supported and theresponsibility of the private sector to provide soundenvironmental solutions.

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