The signs of recovery experienced by the world economy in the second half of 2001/02 financial year were expected to continue into 2002/03 but the world economy began to weaken around the middle of 2002. Financial markets particularly equity and bond markets began to weaken in the second quarter of 2002 and economic indicators in the United States and the Euro area also pointed to a weaker and slower recovery than expected. These indicators included weaker consumer and business confidences thus the Consensus forecasted a slowdown in GDP growth for both the United States and the Euro area for the first half of 2002/2003. Furthermore, the likelihood and the actual occurrence of the Iraqi war exerted downward risks on confidence especially in the United States and the impact of the outbreak of SARS affected the global travel industry particularly in Asia.

Even though the IMF in its World Economic Outlook Report, September 2003, stated that there were signs of renewed recovery and projected global growth at 3.2 percent for 2003 and to pick up to about 4.0 percent in 2004, it was still unclear how broad based and robust it would be. This recovery was underpinned by marked strengthening in equity markets, accompanied by some pickup in business and consumer confidence, particularly in the United States.

In terms of Tonga’s trading partners, the United States economy grew by 2.4 percent in 2002 and was projected to reach 2.6 percent in 2003 and 3.9 percent in 2004. Inflation had fallen considerably amid weak demand and continued substantial excess capacity, with core CPI inflation still well below 2.0 percent. In Japan, the economic growth forecast had been significantly revised upward to 2.0 and 1.4 percent for both 2003 and 2004, given the stronger-than-expected second quarter outturn, the stock market pickup, and heightened optimism about the United States recovery. However, the pace of recovery was expected to be moderate given deflation and corporate and banking system weaknesses in Japan.

After outperforming world economic growth, in 2001 and 2002, the pace of economic growth for Australia and New Zealand, were expected to slowdown in 2003, reflecting a number of factors, including the sizeable appreciation of the Australian and New Zealand dollars over the past two years, declining commodity prices and the lingering impact of drought. In Australia, economic growth is expected to slowdown to 3.0 percent and New Zealand to grow by 2.6 percent in 2003.