There is an extraordinary degree of optimism about world economic prospects in the year ahead. Equity markets, the global barometer of business health, stand at or close to record levels on both sides of the Atlantic and have been climbing in the Pacific; oil prices have begun to flatten after their rise in 1996; the currency markets are relatively becalmed following the surge in the dollar last year; and the Paris-based OECD predicts the best upturn in economic conditions in the industrial countries since the start of the decade.

In its Economic Outlook report for 1997, the normally cautious OECD notes: 'The convergence of economic conditions in the OECD area is likely to continue in the coming year, with robust and sustainable growth in the US and a continuation of expansions in Japan and Europe, following a pause in 1996.'

Moreover, outside the OECD among the emerging market economies the prospects look generally healthy too. The Latin American economies continue to prosper. In the Pacific output should be at least twice that in the OECD countries despite the potential difficulties among tiger economies, particularly South Korea and Thailand which are in the midst of turmoil. Africa is showing signs of recovery and, after a long period of economic decline, Russia and the other CIS countries should come out of their tailspin.

On paper, at least, this confluence of conditions ought to be excellent for the global airline business. The Gulf war and the overcapacity and fare wars, which led the US industry alone to run up losses of $13 billion between 1990 and 1994, are over. The improved global economy has enabled carriers to restore margins and raise revenues, without engaging in the suicidal fare price cutting which traditionally has been so damaging. So far there has been a relatively cautious approach to new investment in capacity, but in the light of recent large orders some warnings have already been sounded.

Much will depend, of course, on the sustainability and confidence in the American economy. With the re-election of President Clinton and the key economic figures Robert Rubin at Treasury and Alan Greenspan at the US Federal Reserve still in office, there is no reason to believe that policy should be very much different in 1997 than it was before the US elections. The OECD forecasts that in the current year American GDP growth will slow marginally from 2.4 per cent last year to 2.2 cent. But it believes the risks of slipping into recession are small.

Demand throughout this year and next will be bolstered by investment and should be assisted by a pick up in export markets as Europe and Japan, as well as some emerging markets, begin to strengthen. If there is a threat of the current long upswing in the economic cycle ending abruptly, it is that the Federal Reserve will raise interest rates, causing a setback on Wall Street and disturbing business and consumer confidence, or if the level of stockbuilding - witnessed in US industry in the latter half of last year -- does not ease.

Among the key reasons for the OECD's optimism about the months ahead is the belief that the German and European economy as a whole have turned the corner. There remain deep structural problems in Europe, not least the high levels of unemployment, fiscal deficits which are too high despite the effort to meet the Maastricht criteria, and growing equity problems - the gap between the haves and have nots - in several European countries.

In Germany a pick up in GDP growth is forecast in the first half of this year: from 1.8 per cent in the last six months of 1996 to 2.3 per cent. The higher output will be fuelled by improved exports, assisted by the decline in the German mark against the currencies of the nation's trading partners, together with strong private consumption. Similarly, France should benefit from currency realignments and the improving international climate.

One of the critical issues for the global recovery in 1997 will be the strength of the Japanese upturn. Last year was one of disappointment when a sharp acceleration in output to 6.4 per cent in the first half of 1996 collapsed in the final six months, when it slipped back into the negative.

Despite this uneven upturn the OECD is confident that prospects remain good. In particular, Japan should begin to reap the benefits of the reversal of the yen's strength, which will improve its terms of trade. Moreover, improved labour market conditions will boost the growth of personal incomes, which in turn should raise consumption. As a result the OECD expects a modest rise in demand to 2.2 per cent in the first half of 1997, gradually picking up momentum in the second half.

As a result all three of the main industrial trading blocs will, barring accidents, move in the same direction in 1997, the first time this has happened during the current trade cycle. What will be different this time around is that this upturn should be supplemented by events in the emerging market economies.

This year and next will see the final emergence of the countries of central and eastern Europe, as well as the CIS, from the shadow of transition to democracy and free markets. The OECD is predicting output growth of 2 per cent in Russia in 1997 rising to 5 per cent in 1998. While this will not reverse the lost output of previous years, it does mean the economy is starting to correct itself after its long nose dive. The problem countries in this region will be Romania and Bulgaria, both of which face financial crisis and are expected to be the focus of attention by the Group of Seven countries early this year.

The broad trend to higher growth and more stable finances for much of the world's economy ought to mean a further important year of consolidation and growth for the airline industry. But optimism needs to be tempered with the knowledge that prosperity can bring hubris, in the shape of overexpansion and overcapacity. Further, the global economy will always be vulnerable to dramatic political events of the kind which could happen at any time in the volatile Middle East.


Source: Airline Business