The international environment

• Iraq's invasion of Kuwait at the beginning of August caused a steep rise in oil and product prices. Since then, the price has fluctuated as market expectations of imminent conflict advanced or receded.
• Inflation rates and trade flows in the industrial economies have begun to show the effects of higher oil prices. Financial markets reacted to the Gulf crisis with a rise in bond yields.
• The divergence of growth between Japan and Germany on the one hand and the United States on the other has become more marked. The contrast is particularly strong with regard to the growth of domestic demand, which remains weak in the United States.
• The relative strength of domestic demand partly explains the continued reduction of G3 external imbalances. Declining current account surpluses in Japan and Germany and the continued decline of the US current account deficit have also been underpinned by exchange rate movements, with the dollar weakening during 1990.
• The higher oil price has exacerbated the problems facing non-oil developing economies and the new democracies of eastern Europe, which have for the most part not achieved the gains in energy efficiency recorded in the industrial economies in recent years.

The international environment