Economies begin march to recession
G7 indicators turning south
Jacqueline Thorpe
Financial Post, with files from Reuters
Monday, April 07, 2003
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Carl Weinberg says he can't remember the last time he saw such a stream of universally miserable economic reports as those that poured out of the global economy last week.
"Every country we watch, in the last few days, has reported at least one indicator turned south or very depressed," said the chief economist of High Frequency Economics. "Almost every one of the declines booked was impressive."
Welcome to the global economy. It's more synchronized than ever, but the consensus among policymakers over how to manage it appears more fractured than ever.
As the Group of Seven finance ministers meet this weekend in Washington alongside the International Monetary Fund and the World Bank, political divisions over Iraq are likely to make the discussion of economic issues more fractious than ever.
"We're in a time of flux in the international arena in terms of all sorts of relationships -- security alliances and economic institutional arrangements, so it will make for perhaps some uncomfortable moments," said Ian Vasquez, director of the Project on Economic Liberty at the Cato Institute in Washington. "I don't think anybody is questioning the importance of interdependence or the trade relationship, rather how some of these institutions are supposed to operate if the major countries don't see eye-to-eye on certain issues."
That the world economy has taken a turn for the worst is clear from the wave of disappointing figures last week. Manufacturing in the United States, Europe and Britain is contracting while the U.S. and European service sectors are in negative territory.
Eurozone consumer confidence hit a nine-year low, German joblessness hit a five-year high, the United States said 465,000 jobs vanished in the past two months and nothing changed in Japan.
Growth was marked down all over Asia as severe acute respiratory syndrome hits one of the few areas of the planet that is still reporting decent growth.
Just as the Group of Seven industrialized countries marched lock step toward recession in 2001, they seem to be heading down the same path this year.
Morgan Stanley, the Wall Street investment bank, believes the global economy will post 2.4% growth this year, below the 2.5% thought to signal a global recession.
Such synchronization is rare. Apart from 2001, the last time the major industrialized countries slumped in tandem was during the oil shocks of the 1970s.
But not unexpected given the extent to which economies have become integrated through free trade and corporate expansion, said Stéfane Marion, senior economist at National Bank Financial.
And when the United States -- which has accounted for some 60% of global growth over the past few years -- goes down, it is no surprise the rest of the world gets sucked down with it. Canada has been, of course, the happy exception to this rule -- so far.
"You're synchronizing your production at the global level," Mr. Marion said. "At some point, maybe there's a bigger case for synchronized efforts in the G7."
Goldman Sachs has been arguing for just such a strategy over the past year. It advocates co-ordinated interest rate cuts, a depreciation of the U.S. dollar and an appreciation of the Chinese currency to offer relief to other exporters.
But such co-ordination is unlikely to emerge from Washington this weekend.
First of all, policymakers are not clear whether the latest slippage in world growth is due mainly to the war in Iraq or underlying economic deterioration.
Alan Greenspan, chairman of the U.S. Federal Reserve Board, certainly believes the pressure should ease with the end of the war.
"The real debate on the policy front will be whether there's more to [the slowdown] than just a pause," said Stephen Poloz, chief economist at Export Development Canada. "I'm sure they will debate it all day and then, it will as usual, come down to a judgment call."
Secondly, finance ministers and central bankers have not exactly been singing from the same policy songbook through the most recent downturn. Old policy divisions are likely to come to the fore again.
The United States will argue it has done about all it can to boost growth by cutting interest rates to 1.75% and that Europe needs to take up the slack by cutting rates further and speeding up labour market reform. Europe's benchmark rate stands at 2.50%.
Eurozone representatives will criticize runaway U.S. spending.
Wim Duisenberg, European Central Bank president, brought up this thorny issue again last week when he said U.S. trade and budget deficits were a risk to world growth.
On top of the usual frictions, policymakers now have to deal with political divisions over the war in Iraq, which has sided the "old Europe" of France and Germany against Britain and the United States.
"You have to ask how deep personalities and emotions go when it comes down to dollars and cents and I think on the surface it's bound to change the tone of those kind of meetings and it could affect the candour and forthrightness of negotiations," Mr. Poloz said.
For his part, U.S. Treasury Secretary John Snow said the ill feeling over Iraq had not yet spilled over into the finance ministers arena.
"The relations among the finance ministers have remained most cordial throughout all of this," Mr. Snow said in Florida last week.
But he made clear a big chunk of discussions might be devoted to postwar Iraq and whether the IMF and World Bank could help as administrative agencies in the reconstruction effort.
"It hasn't been decided yet, but it's the sort of subject that might well be useful for discussion at the G7," Mr. Snow said.
With Iraq taking up much of the agenda and little consensus on economic issues, the G7 meeting is likely to turn into its usual gabfest. The economic slowdown will be left to run its course.
"The notion of co-ordinated policy just doesn't fit the current circumstances right now," Mr. Weinberg said. "All governments can do is hunker down and hope that it's over fast."
jthorpe@nationalpost.com |
