Morgan Stanley Dean Witter's Stephen S. Roach
Stephen S. Roach
The next global growth surprise
There seems to be no stopping the global economy. We are continuing in
the long march to upgrade our above-consensus global growth forecast.
At the same time, the thrust of world policy is listing in an
increasingly pro-growth direction. The result is a powerful combination
of growth momentum and policy stimulus that stands in sharp contrast
with more austere conditions prevailing over most of the 1990s.
Our global GDP growth outlook for the year 2000 has finally hit the 4%
milestone, one full percentage point higher than our
already-above-consensus 3% prognosis at the start of this year, about
0.5 of a percentage point above current projections of the IMF and the
OECD, and at least 0.75 of a percentage point above the 3 - 3.25%
consensus outlook embedded in world financial markets.
Our latest upgrade reflects a relatively modest upward revision to our
2000 Euroland growth outlook to 3.3% (from 3.1%). In addition, risks
remain decidedly on the upside of our forecasts elsewhere in the world.
That's especially the case in light of our well-below-consensus
prognosis for renewed recession in Japan in 2000.
The world is coming together faster than policymakers and investors
appreciate. This growth surprise could spell an increasingly
synchronous and vigorous year for the global economy. As a result, I
believe that the risks to global GDP growth next year are still skewed
toward the 4.5 - 5% range, which would make 2000 the strongest and most
synchronous year in 13 years. A synchronous year is also likely to be a
surprisingly cyclical one. Financial markets remain unprepared for that
possibility.
Name: Greg Robins
Do you feel that countries strong in commodities will fare better than
foreign countries that are technologically oriented? How does this
affect your view of the Latin American markets, which seem to have both
segments as well as a growing population?
Stephen S. Roach: I continue to believe the most powerful force shaping
the global economy over the next five years will be the globalization
of technology. That means that countries that have prowess in the
production of technology tools, whether hardware or software, should be
outstanding relative performers compared with their peers elsewhere
around the world. Having said that, commodity-intensive producers
(where ever they may be) are also likely to fare quite well, in large
part because commodity prices are so depressed relative to their
longer-term historic norms. As the global economy rebounds, commodity
prices should enjoy a sizable uplift and that should provide some
near-term cyclical opportunity for that segment of the market.
Name: Sudhir Bafna
In view of your bearish forecast for Japan, do you think shorting the
Japan WEB (EWJ) will be profitable?
Stephen S. Roach: We think that all the bad news with respect to Japan
is now in the market. And while there are mixed signals on the outlook
for the Japanese economy, we continue to believe that the real story
for investors looking to yen-denominated assets has mainly to do with
the restructuring-related dividends that will show up on the earnings
front. We remain optimistic that, even in a stagnant economic climate,
Japan will deliver better-than-expected earnings. Moreover, we feel
that the yen will remain biased toward strengthening, which underscores
the potential return for dollar-denominated investors. In the context
of our global asset allocation portfolio (as we publish it every other
month in our flagship publication, The Macro Navigator), we continue to
recommend a significant overweighting of Japan in an all-equity
portfolio.
Name: John Westergaard
I don't see how you can skip over Y2K's implications on the first half
of next year. Don't you wonder about the possibly that there might be a
hiccup in the world economy in the first and possibly second quarters
of 2000 as Y2K glitches surface? Two years ago, I wrote that computer
and related equipment vendors would experience downturns in 4Q99. I
asked who would be installing new equipment at this point in time if
they could put it off. Now we see IBM and Xerox reporting "surprises."
Where's the surprise other than to learn how short sighted IBM and
Xerox management are? The point is: If management and Wall Street so
badly misjudged this fourth quarter, couldn't they be making the same
mistake for early next year?
Stephen S. Roach: I certainly don't want to minimize Y2K as a potential
macro risk factor. But as we get closer and closer to the event itself,
it appears, at least as of mid-December, that a lot of the stockpiling
that many of us expected in anticipation of Y2K-related distortions
just hasn't played out that way. If you don't get a lot of excessive
inventory building, you're not going to get the payback from that in
early 2000. So while we think there'll be some significant bumps in the
road from Y2K, we don't view this as an event that will truly distort
the otherwise significant underlying vigor of the global economy.
Moreover, in our surveys of technology spending plans by the United
States and global companies, we've found that a lot of projects have
simply been put on hold during this final push to Y2K compliance. Once
the event itself passes, many of the projects on the back burner,
especially e-commerce-related initiatives, will be given attention and
will be funded; this should drive business capital spending ahead with
solid underlying momentum.
Name: Don Wilkening
In light of the vigorous forecast, why does the CRB index and all of
the prices of other commodities (except oil) remain at or near a
longer-term low? When do you project these commodities to finally rise;
will metals move upward faster then grains?
Stephen S. Roach: Commodity prices have already stabilized, and they've
been inching up a little bit off their lows. However, most of this
increase has come from what we call "managing the supply side" of
commodity markets - as producers have taken excess capacity out of a
number of areas, such as oil, copper and some of the other metals. In
2000, however, we think that the predominant force to affect worldwide
commodity markets will be the solid impetus likely from the demand side
of the equation, as the global economy grows by at least 4 percent.
Adding this demand impetus to the well-managed supply side of these
markets will, we think, result in a fairly significant rise in the
prices of economically sensitive base metals and other industrial
materials..
Name: Alfred Davie
What's convertibility's role into gold-backed currencies in a stable
monetary world of free trade?
Stephen S. Roach: I am not a "gold bug." I don't believe that we need a
hard-metal anchor to stabilize foreign exchange markets. We certainly
do need disciplined fiscal, monetary and other types of macroeconomic
policies to stabilize currency markets. And I think we've seen a lot of
progress in that regard in the last 10 years. But that's not to say we
still can't have periodic bouts of significant currency instability, as
we saw in the depths of the Asian crisis in 1997 and 1998. However, my
guess is that full convertibility into gold, if it were lacking in
related monetary and fiscal discipline, would do no better in
stabilizing currencies than the system we now have in place.
Name: Allan Cox
You're very optimistic about impending global growth. You even say it's
coming together faster than experts expected. Cut back to about five
years ago when you were quoted saying (regarding information
technology), "The big steps will come with applications that truly
change the functions of work and leisure. And they have yet to be
taken." My question has three parts: 1) Have they now been taken? 2) If
so, how are they having impact on global growth; and 3) what global
corporations are leading in ways we haven't yet fully appreciated?
Stephen S. Roach: I believe that a number of big steps have now been
taken in terms of equipping workers in the United States and,
increasingly, in Europe and in parts of Asia with significantly greater
endowments of information technology hardware and software. The key
question, though, is whether this increased spending is having an
impact on global economic growth. "New paradigm" claims
notwithstanding, I believe the jury is still out on the long-awaited
paybacks from the Information Age. I think that a lot of people have
concluded that the long-awaited payback from the information age is at
hand, but I'm more skeptical on that. I think that we still have a lot
of heavy lifting to do before we can proclaim the miracles of
information technology in boosting the white-collar productivity of
America's and the world's vast collection of knowledge workers.
Because it's faster and portable, information technology allows workers
to be more mobile and to use these tools for much longer than the
workdays that are typically reported to the government in their various
surveys. So there's a risk that we are confusing productivity with
longer work schedules. Productivity is not about working longer; it's
about working more effectively.
Name: W. T. Tholen
You say your forecast is for a renewed recession in Japan for 2000. Why
do you feel this way? What is your forecast for Japanese growth in
specific and for the other Far Eastern countries?
Stephen S. Roach: We do forecast a return to recession in Japan in
2000. The reason, paradoxically, is that we're optimistic about an
accelerated pace of restructuring in corporate Japan. Based on the
experience in the United States and Europe, we know that when companies
restructure, they fire workers, which diminishes the income stream for
the economy as a whole. And without income, consumers turn defensive
and save rather than spend. At the same time, ongoing restructuring
will reduce the capital spending dynamic in Japan, which could also
play a role in tipping the country back into recession. Our call for a
drop of about 1 percent in Japanese GDP compares with the consensus
forecast of about 1.5 percent growth. If we're wrong and the rest of
the pack is right, that will be yet another reason to raise our global
growth forecast.
We do not think the Japanese outlook is indicative of the prospects for
the rest of the region. We remain reasonably bullish on non-Japan Asia,
where we've raised our growth projections many times in the past nine
months, as these countries have emerged from the worst of the global
currency crisis of 1997 to 1998.
E-Mail: foxes@iolt.com
Name: Sam Fox
Could you define more specifically what you mean by a "synchronous"
year? In what sense do the financial markets "remain unprepared for
that possibility"? Do you mean the markets don't understand the
implications? Or do you mean the tools and equipment aren't adequate to
handle the load that could be implied by this phenomenon?
Stephen S. Roach: By a "synchronous year," we mean that all the major
regions of the world will be pulling in the same direction - toward
higher growth. That means ongoing vigor in the United States, augmented
by accelerating growth in Europe, Latin America, the crisis-affected
regions of non-Japan Asia and possibly even Japan. (As noted, our
baseline view on Japan is that investors should be careful in jumping
to the conclusion that Japan is on the mend; but if the consensus is
even close to being right in its forecast of 1.5 percent growth, we'll
have to throw a nod in that direction as well.)
Using quantitative analytical techniques to assess the growth outcome
that is priced into a whole host of financial assets, we see the
markets currently discounting only about 3 percent growth in the world
next year. Our forecast for global GDP growth is at 4 percent and
rising. So the markets are looking for only a modest recovery at best
in 2000 to 2001; in my judgment, they are unprepared for what are
shaping up as some of the most vigorous years in the global economy
since 1988.
Name: Peter
Will current popular opposition to the WTO (American participation)
impact the success of American companies in the global economy?
Stephen S. Roach: My guess is that China's case for World Trade
Organization accession will pass Congress early next year, which will
be viewed as a big plus for U.S. multinationals operating not just in
China but also in countries that are linked indirectly to China.
However, if this becomes a hot political issue and Congress responds to
that by vetoing the bilateral trade negotiations that were agreed upon
between the United States and China last month, then I think that would
be a negative for corporate America and for the broader global economy.
Free trade is a big plus for growth. I think a vote against free trade,
by inference, would have to be viewed as a negative. Congressional
rejection of the United States-China trade accords would not have an
immediate impact on the economy, but over the long haul, U.S.
multinationals would lose if they were denied access to the markets of
the world's largest economy in terms of population.
Name: Dylan Murphy
How big a role do you think the digital revolution will play in the
global economy? How fast will software companies and hardware companies
grow? Will there be a great deal of competition from outside the United
States? Will the United States maintain its lead in these areas? What
is the best way to position oneself to take advantage of this coming
trend?
Stephen S. Roach: I think the digital revolution will have an enormous
role. Morgan Stanley Dean Witter's global economics team is working on
a study entitled, "The Globalization of the Information Age." This
effort is built around the observation that information technology
hardware is currently about 5 percent of the overall nominal GDP in the
United States - double the percentage prevailing in Europe, Japan and
elsewhere around the world. There's no intrinsic reason, in my view,
why the United States should be alone in recognizing the potential of
this much technology as a productive tool. So, in looking out over the
next five to 10 years, I think the rest of the world is going to move
decisively in attempting to catch up, raising technology endowment
levels to levels comparable with those in the United States. That holds
out the possibility of extraordinarily rapid growth in the technology
business for the next five years, as the information age, particularly
the e-commerce revolution, goes global.
Of course, the big question for investors is: How much of this is in
the price? Although we can't be precise in assessing the earnings
expectations imbedded in technology stocks, it appears that investors
are making some very heroic long-term assumptions about technology
demand. So we're still nervous that, despite the powerful a macro case
for technology, the market may have gotten ahead of itself.
Name: A. Gandhi
European managements are starting to think in terms of increasing
shareholder values the way U.S. businesses have been thinking since the
past 10 to 15 years. Given that, and the fact that Europeans are
starting to put much more money into equities, I see a long-term bull
market in Europe along the lines of the United States in the past 10 to
15 years. Do you agree with this? Also, what do you think could go
wrong with this line of thinking?
Stephen S. Roach: I think if left to its own devices, there's no
question that corporate Europe would increasingly take on many of the
restructuring-led dynamics that have been so successful in America. For
example, we've seen a lot of cross-border mergers in Europe in 1999.
The magnitude of the consolidation is exploding, creating truly
pan-regional champions that combine the best of companies from a
variety of European nation states. And, as you noted, Europeans are
rushing to embrace equity mutual funds, especially in Spain and Italy,
creating a powerful liquidity effect that that should also boost
European equity markets for some time.
Having said all that, I'm a little suspicious about Europe's ability to
sustain a long-term bull market comparable to the decade-long rise in
the United States. Europe still has some attributes of an old, creaky
culture that was not entrepreneurial and was not focused on delivering
value to shareholders. So I suspect that Europe will make more limited
progress in moving down the road to restructuring than U.S. companies
did in the 1980s. |
