The international environment

• The buoyant US economy slowed in the third quarter, mainly because of lower consumer spending, but picked up again in the fourth quarter.
  
  
• The slowdown in Europe may have troughed in mid-1996. GDP growth in Germany, France and Italy was quite strong in the third quarter, largely led by exports. But it was boosted by temporary, special factors and domestic demand remained weak.
  
  
• The slow recovery in Japan continued in the third quarter. There, too, the external sector has offset falls in domestic demand.
  
  
• Inflation remained low, reflecting the large output gaps in several continental European countries and in Japan. Inflation in the United States has been surprisingly low.
  
  
• Several European countries cut official interest rates in November and December. But in the G3 countries, interest rates were left unchanged in the fourth quarter. All major industrial countries plan to tighten fiscal policy in 1997.
  
  
• Ten-year government bond yields fell further over the fourth quarter as a whole, but started rising during December.
  
  
• Global trends in world growth and trade have been favourable, with a convergence of growth in most regions. In particular, growth seems to have stabilised at a sustainable level in the dynamic Asian economies, and increased in the transition economies of Central and Eastern Europe.

The international environment