Euroland: peak of the upswing - little evidence of a new economy

In the summer of 2000, the economic expansion in Euroland has continued at a rapid pace. However, a number of leading indicators suggest that the upswing will pass its peak in the second half of this year. Several reasons are responsible for the slowdown. The European Central Bank has corrected the expansionary course after the inflationary risks in the euro area had increased; households and firms experience a reduction of real income due to the deterioration of the terms of trade; finally the export boom is coming to an end as the world economy slows down somewhat and the effects from the euro depreciation slowly fade. Real GDP will rise by 2.9 percent next year. While output growth will slow down gradually and approach the growth rate of potential output, employment will continue to expand swiftly, and the unemployment rate will decline to around 8 percent by the end of 2001. Inflation will remain above the ECB's target of 2 percent for the rest of this year and decelerate only moderately in the course of next year. While external factors will lose their impact, the core rate of inflation will remain headed upwards. The situation of public budgets seems to improve as there will be large revenues from the sale of mobile phone licenses in a number of countries. European governments intend to use these receipts to reduce public debt. The savings in terms of interest payments should also not be used to raise public spending. Sustained fiscal consolidation requires that government expenditures increase at a lower rate than GDP over an extended period of time. This is also necessary to support the course of lowering the tax burden in order to strengthen economic growth. Direct taxes will be reduced considerably in 2001, the reduction will amount to some 0.8 percent of GDP. As a consequence, structural budget deficits will rise. The increases of key interest rates can be justified on the basis of the strategy of the ECB. Since the beginning of EMU, money growth has been higher than intended. Thus, there was a need for correction. Otherwise, the risks for price level stability would have increased even more. The ECB should make sure that it will achieve its target of price level stability because this is essential for its credibility. It is also important for the attractiveness of the monetary union in general. Stability risks in Euroland did, however, not emerge because of a wrong strategy but because the strategy was not followed strictly enough by the ECB. In contrast to the situation in the United States,' there is not yet an acceleration of the increase in productivity in Euroland. However, the "new economy" will also gain ground in the euro area especially since the use of the internet is increasing rapidly. But productivity gains will remain below those observed in the US partly because the share of the computer industry is smaller. In addition, the advance of new technologies is connected with substantial structural changes in the economy. If the gains in productivity are to materialize, product and labor markets must show sufficient flexibility; this, however, is more likely in the US than in Euroland. The current weakness of the euro is usually explained by cyclical factors. Interest rate differentials as well as differences in economic growth play a key role. It can be shown that there is a close relationship between real interest rate differentials and the real exchange rate. Growth differentials do not have much additional explanatory power. On the basis of the model, a gradual appreciation of the euro towards parity vis-a-vis the US dollar is forecast. --

Upswing in Europe gains momentum, but unemployment remains high

The expansion of Western European production accelerated in the first half of 1997. Exports were the main engine, driven by a devaluation of European currencies and strong growth abroad. Domestic demand also picked up somewhat led by investment in machinery and equipment. Inflation remained at low levels. However, in most countries the bottom seems to have been reached. One major concern is the rise in import prices. The upswing will further gain momentum in the coming months and in 1998 as conditions shaping the cycle remain favorable. Real GDP in Western Europe will increase by 3 percent in 1998. Under the assumption that the decision concerning EMU due in spring 1998 is made in favor of a large monetary union, those countries with relatively high short-term interest rates will lower them quite substantially in next year. Against the background of high unemployment, countries with low interest rates will not raise key interest rates significantly. As a consequence, monetary policy in Western Europe on average will be further loosened. This will additionally stimulate economic activity but also raise risks of inflation. The major problem in Western Europe is unemployment, which remains stubbornly high or is even rising. As a contrast, unemployment in the United States has come down to the lowest level since decades. It is often stated that high unemployment in Europe is due to a restrictive monetary policy, led by a—supposedly—deflationary policy pursued by the Deutsche Bundesbank. This view, however, does not find any support when indicators of monetary policy are taken into account. Rather, they suggest that monetary policy has been expansionary in Europe for some time. In addition, the reduction of inflation since 1990 has been equally pronounced in Europe and the United States, which indicates that the monetary stance has not been significantly different. Furthermore, a striking fact in this regard is that the relatively steep fall of inflation in the United Kingdom was associated with a significant decline in unemployment. While total unemployment in Europe has followed an upward trend resulting in an approximate doubling of the rate, there have been notable exceptions within Europe. Among those economies that have experienced a decline in recent years are the United Kingdom, the Netherlands and Ireland; other countries seem to have joined the club. Overall, a variety of measures has contributed to the improvement of labor market performance in these countries. They include deregulations of product and labor markets that have led to wage moderation and more wage differentiation, and reforms of the tax and transfer systems that have resulted in improved incentives for both labor demand and labor supply. A central feature of individual countries' experience is that reforms tend to be more effective when they are comprehensive since there are important synergies between structural reforms in different fields. --

Evidence of the new economy at the macroeconomic level and implications for monetary policy

The notion of new economy was coined in the United States when there was increasing evidence that, as a result of the introduction of new technologies, the traditional behavior of macroeconomic variables might have changed. The expansion of the 1990s differed from its predecessors in three important respects: productivity, inflation, and cyclical variability. In the United States, labor productivity increased much faster in the 1990s than in the previous decades and, contrary to the usual pattern, accelerated with the duration of the expansion. The view that most of the productivity acceleration was only cyclical and therefore not sustainable over a longer period of time has proven overly pessimistic. Productivity growth has remained on its elevated since the economy peaked. In other large industrial countries, by contrast, productivity growth has continued to decline or has improved only very slightly at best. Differences in productivity trends between the United States and other large industrial countries can be explained partly by the fact that in the United States IT production is more important and IT implementation relatively advanced. In addition, the identification of IT-related productivity gains in Europe is complicated by the general trend towards deregulation in labor and product markets and moderate wage increases that contributed to a rise in labor intensity, which tends to lower advances in productivity. In contrast to productivity developments, the behavior of inflation is consistent with a new economy in all large industrial countries. The moderate inflation can, however, be explained by adequate monetary policies and cyclical influences. Similarly, the analysis of cyclical variability concludes that changes in economic policies are a more important factor in explaining the reduced fluctuations in U.S. GDP than the advent of IT. A technology shock which raises the permanent level of output and, at least temporarily, the growth rate of the production potential has implications for monetary policy. In a world with rational expectations and sticky prices, the optimal reaction of monetary policy to an acceleration of potential output growth is to raise interest rates. The reason is that the expectation of higher incomes in the future causes current spending to grow faster than potential output and thus leads to inflationary pressure. In reality the optimal response of monetary policy to a shift in production potential is difficult to assess given the uncertainty concerning the timing and magnitude of new economy effects on the real economy. Being too expansionary probably has more severe consequences than erring on the other side, because the positive real effects would work through anyway, while inflationary expectations, once triggered, are difficult to reduce. --

Finite Element Based HWB Centerbody Structural Optimization and Weight Prediction

This paper describes a scalable structural model suitable for Hybrid Wing Body (HWB) centerbody analysis and optimization. The geometry of the centerbody and primary wing structure is based on a Vehicle Sketch Pad (VSP) surface model of the aircraft and a FLOPS compatible parameterization of the centerbody. Structural analysis, optimization, and weight calculation are based on a Nastran finite element model of the primary HWB structural components, featuring centerbody, mid section, and outboard wing. Different centerbody designs like single bay or multi-bay options are analyzed and weight calculations are compared to current FLOPS results. For proper structural sizing and weight estimation, internal pressure and maneuver flight loads are applied. Results are presented for aerodynamic loads, deformations, and centerbody weight

Conceptual Design and Structural Analysis of an Open Rotor Hybrid Wing Body Aircraft

Through a recent NASA contract, Boeing Research and Technology in Huntington Beach, CA developed and optimized a conceptual design of an open rotor hybrid wing body aircraft (HWB). Open rotor engines offer a significant potential for fuel burn savings over turbofan engines, while the HWB configuration potentially allows to offset noise penalties through possible engine shielding. Researchers at NASA Langley converted the Boeing design to a FLOPS model which will be used to develop take-off and landing trajectories for community noise analyses. The FLOPS model was calibrated using Boeing data and shows good agreement with the original Boeing design. To complement Boeing s detailed aerodynamics and propulsion airframe integration work, a newly developed and validated conceptual structural analysis and optimization tool was used for a conceptual loads analysis and structural weights estimate. Structural optimization and weight calculation are based on a Nastran finite element model of the primary HWB structure, featuring centerbody, mid section, outboard wing, and aft body. Results for flight loads, deformations, wing weight, and centerbody weight are presented and compared to Boeing and FLOPS analyses