Despite the recent oil price hikes, global inflation has remained low and stable (figure 1.3), partly due to restrictions to wage increases, a tight macroeconomic policy stance in both advanced and developing countries, and the supply of cheap manufactures from China. In general, there is little concern about overheating in most economies.
Since 2003, long-term interest rates in the advanced countries have increased from an average of 3.6 per cent to 4.3 per cent in mid-2006; the newly industrialized economies (NIEs) experienced the same trend (figure 1.4). Concerns about expected higher inflation rates led monetary authorities in the USA and in the European Union (EU) to raise short-term rates as a pre-emptive measure, resulting in higher long-term interest rates. Most developing countries have also been tightening monetary policy through higher interest rates and reserve requirements (UN-DESA 2006; IMF 2006). Rising interest rates might contribute to retarding economic recovery by depressing domestic demand, especially private investment.
Fiscal balance improving in most regions The fiscal balance has improved in most regions since 2003 (figure 1.5). In the advanced economies, the fiscal deficit declined from 3.1 per cent of GDP in 2003 to 2.1 per cent in 2006. Fiscal deficits have also declined in Asia and Latin America.
The reduction in the budget deficit was particularly strong in China: from 3 per cent in 2002 to just over 1 per cent in 2006. This development was mainly driven by relatively high growth rates, which contributed to increased government revenues.
It was also the result of continued adherence to a tight fiscal policy stance in both developed and developing countries. Oil and commodity exporters in developing countries have witnessed a significant improvement in their fiscal balance position due to high oil prices. In some Asian countries, fiscal policy continues to be expansionary due to increased social and development spending. To ensure fiscal sustainability, governments need to broaden the tax base so as to increase revenue (UN-DESA 2006; IMF 2006).
Generally, the currencies of many developing countries have appreciated against the dollar. Energy and commodity exporters experienced a 10-20 per cent exchange rate depreciation during the second quarter of 2006, but the trend towards appreciation has resumed since then. It is expected that the depreciation of the dollar will continue and the risk of a sudden depreciation due to worsening global macroeconomic imbalances persists (UN-DESA 2006).
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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