Interest rates, and large capital outflows point to a continued accommodative stance.

The economy is expected to continue to grow robustly, although not at the pace seen before

last year’s slowdown. Staff projects GDP growth of 5? percent in 2005, fuelled by consumption.

Both exports and investment are expected to remain subdued compared to previous years, high

oil prices notwithstanding, as concerns about the investment climate linger and supply constraints

in the oil sector are unlikely to ease in the near future. Inflation, which was already

running at an annual rate of 7? percent in the first half of 2005, is likely to exceed the official

target again this year. External vulnerability has been greatly reduced since the 1998 crisis owing

to a very favorable balance of payments position and large foreign reserves of more than 3? times

short term debt.

16.7.1.4. Read, translate the text “IMF Forecasts on Global Economic Development” and explain

the indexes in the graph.

IMF Forecasts on Global Economic Development

Recent forecasts by leading national and international economic organisations on global economic

development prospects in 2004 were favourable, though every report paid tribute to the high

uncertainty of the world outlook and the possibility of a gloomier outcome.

In its emergency December issue of the World Economic Outlook, the IMF released new projections

of global economic development.

Real GDP growth world-wide in 2003 was forecast at 2.4 per cent which was 1.1 percentage

points lower than the previous year forecast. However, the IMF expects stabilisation of the US

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economy in early 2004, with a “firmer pickup” in the second half of the year. Since the US is the

country, which dragged the world into recession, it makes sense that it should also drag it back out.

Indeed, the consumer confidence indicators of the Conference Board improved in December,

showing that the American economy may be near the turning point (see Figure 16.2).

Economic prospects for European countries are even less certain. However, the economic sentiment

indicator for the EU shows a slight recovery in December 2003.

The facts, that industrialized countries are not experiencing crucial structural problems, that

monetary policies have recently been eased in most countries and that commodity prices are now

at low levels, speak for the possibility of an early economic upturn. Given the December rise in

business and consumer confidence indicators in the US and in Europe, there is hope that economic

activity might soon gather momentum.

Growth for the CIS economies is forecast by the IMF at 2.6—2.9 per cent in 2004 — assuming

chat the fall in commodity prices will not be too drastic, so that investment and consumer expenditures

will be able to keep the economies afloat.

■ USA (left scale) ■ EU (right scale)

Figure 16.2. Indexes of Consumer Confidence in the US and EU

Source: The Conference Board, The European Commission

Commentary and Notes to Text 16.7.1.4

1. To pay tribute to... — отдавать должное...

2. high uncertainty — высокая (большая) неопределенность

3. outlook — перспективы

4. gloomy — мрачный

5. emergency issue — чрезвычайный выпуск

6. to release — опубликовать

7. to drag... into — ввергнуть (≪втащить≫)

8. an economic upturn — экономический подъем

9. to gather momentum — усиливаться

10. CIS — Commonwealth of Independent States — Содружество Независимых Государств

(СНГ)

16.7.1.5. Read, translate the text “Inflation as a Sign of Depression and Crisis” and define the

reasons causing inflation.

( ! ) Inflation as a Sign o f Depression and Crisis

Inflation is usually a threatening warning against the coming depressions and crises. Let us

consider this phenomenon.

By inflation we mean persistent increases in the general level of prices. It can be seen as a devaluing

of the worth of money. Its most serious recent appearance occurred during the 1970s in the

wake of the quadrupling of oil prices in 1973, when annual inflation rates in the developed world

rose as high as 25 per cent, but for the rest of the post-war period it has not been unusual for the

inflation rate to be exceeded by the real growth rate. A crucial feature of inflation is that price rises

are sustained. A once-only increase in the rate of value-added tax will immediately put up prices,

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but this does not represent inflation, unless the indirect effects of the VAT rise have repercussions

on prices in periods after the direct effects.

Accounts of the causes of inflation are numerous. The most popular arguments are that it is

caused by excess demand in the economy, that it is caused by high costs and that it results from

excessive increases in the money supply.

An excess of demand causes producers to raise their prices — but this leads workers to demand

higher wages to maintain their living standard; this causes higher demand and the process begins

again. Similarly, if under the cost-push argument the cost increases stimulating price rises and

wage costs (which represents most of the total net costs of the economy), firms can still only raise

their prices if the demand is there for their goods to sell — if not, high costs merely bankrupt them.

These causes amount to an attempt by a nation to live beyond its means, or to enjoy a living standard

higher than that allowed by its output and borrowing.

When oil prices rose in the 1970s, countries without oil suffered a loss of their real income and

should have accepted a cut in living standards; unable to impose a cut, however, governments attempted

to maintain higher levels of income than were merited by the products to be bought by

that income. Too much money chasing too few goods inevitably caused inflation. Controlling inflation

by restricting demand (either through tight control of the money supply through high rates

of interest, or through cuts in government borrowing) has costs, however. If wages are growing

rapidly, and the government squeezes demand in the economy, unemployment may result because

employers will not be able to afford to pay their staff if they cannot raise their sales prices because

of low demand. In other words, if wages are high, but aggregate demand is restricted, firms will

have high costs but will not be able to pass these on in higher prices because sales will be too low.

and many will go out of business or sack some of their employees. In the short term, it appears than

by allowing higher demand, inflation occurs, but unemployment can be lower than otherwise.

Commentary and Notes to Text 16.7.1.5