Business and Industry Review

Introduction

Overview

(For Annual Average Rates of Growth of Manufacturing Output, see Table I; for Pattern of Output, see Table III; for Index Numbers of Production, Employment, and Productivity in Manufacturing Industries, see Table IV.)
The world economy prospered in 1997. Total world output rose by more than 3%, with manufacturing growing by almost twice that rate and, unusually, with the economies of the industrialized countries outpacing those of less-developed nations. Though there were some warning signs by the end of 1997 of the crisis that began in mid-1997 in Thailand and then spread to other Asian economies, the rest of the world financial market remained unaffected until August 1998, when the turbulence spread following Russia's declaration of a debt moratorium. As a result, the possibility of a more generalized slowdown in the world economy became real, and international industry observers feared that Western industrial economies, having failed to avoid the contagious ailing financial market, might also "catch" recession from Asia. (See Spotlight: The Troubled World Economy.)
In North America, where production had enjoyed a six-year increase, output accelerated in 1997. Industrial production in the U.S. rose 5% and was boosted by capital formation, which reached a 19-year high. Canada experienced similar results, with soaring business investment driving a 4.9% rise in industrial production. The strength of the industrial North American powerhouse helped produce a year of record growth in South America, most notably in Argentina, Chile, and Peru, where total output rose 7-8%.
In continental Europe, where the fiscal consolidation imposed by the Treaty on European Union had been implemented, activity was recovering, particularly in the peripheral regions. Industrial production rose nearly 4% in Germany and France; at least 4% in Austria, Belgium, The Netherlands, and Portugal; nearly 7% in Spain; and more than 15% in Ireland. The relative strength of the core EU economies had beneficial spillover effects in Eastern Europe (see Table II), most obviously in those countries that were successfully making the transition to a market economy. In Poland industrial output rose more than 50% during the 1990s, but in countries that were struggling to make the transition from a centrally planned economy output declined by 50% during that same period.
The official data for Asia in 1997 showed few signs of the turmoil ahead. Across the region, healthy growth rates for the year as a whole were recorded--more than 7% for manufacturing in Asia, excluding Japan and Israel. Only in Thailand, where the troubles began, did output decline. Even in Japan, which of the major economies suffered most from the Asian crisis, industrial production rose more than 4%, although overall output rose less than 1%.
The changing pattern of activity was illustrated by patchy performances from some sectors. Even in a buoyant year output of clothing and footwear declined, whereas textiles recorded their first year of growth since 1994. At the opposite extreme, output of electrical equipment, including computers, rose 14%, faster than the 10% average of the previous three years.
The strength of activity in 1997 carried through into the first half of 1998, and for a time it was possible to believe that Western economies and financial markets would escape the worst of the Asian downturn. That view changed with the Russian debt moratorium, which produced a complete reassessment of the international economic outlook. It also became clear that the Japanese economy was even more severely affected than was previously thought--households increased their already very high rate of savings, knowing that, in a deflationary climate, goods in the shops would be falling rather than rising in price. There was a stark contrast between the 1994 Mexican crisis, when strong U.S. demand helped boost demand for Mexican exports, and the 1998 Asian crisis, in which Japan was unable to undertake the U.S. role.
As 1998 came to a close, a cloud hung over the global economy. Economic forecasts were downgraded, and there was a risk of recession. The Asian crisis stemmed from years of overinvestment and was compounded by a collapse in demand in that region. In addition an excess global supply of goods was forcing down prices.

 

GEOFFREY R. DICKS