stratfor.com
THE GLOBAL ECONOMY
9 April 2002
The basic, unsynchronized economic pattern that we have seen since 1997 remains intact. The U.S. economy is emerging from its recession. This is partly driven by Federal Reserve policy but also by low first-quarter energy prices and the inherent robustness of the U.S. economy. Demographics also play a part: aging boomers are building 401K inputs automatically, which in turn fuel capital formation. Inventories are low, and this is stimulating manufacturing and employment. The strength of the dollar is also attracting overseas investment. In fact, deflation in Japan and Asia are having largely beneficial effects in the United States. We expect the U.S. economy to make a much stronger recovery than prevailing forecasts anticipate. This strength will also help silence global discontent over Washington's bully trade policy and will help position the Republicans for a strong showing in mid-term elections in the fall.
While the United States is moving back to expansion, Japan remains mired in depression. We do not expect a collapse in 2002, however. Japan has more than $3 trillion in overseas assets, and it is in the process of liquidating some of them and repatriating the proceeds. This is a huge cushion against complete collapse.
There are two problems with this scenario. First, most capital in Japan is being put into unproductive investments, mainly government securities, and banks are simply not lending. Second, at a certain point, investors will give up on domestic investments to the point that they will want to keep their assets overseas out of harm's way. The lack of private-sector investment is the first sign of danger; the next -- when repatriation stops -- will be the critical point and a prelude to capital flight. The Nikkei's first-quarter gains -- engineered by Tokyo in advance of the April 1 introduction of new accounting standards and the end to unlimited time-deposit insurance - will be lost in the second quarter as banks sell securities to take advantage of pumped-up share prices. The Nikkei reversal and a steady up-tick in corporate and personal bankruptcies will pour cold water on domestic confidence. We do not expect any disasters or solutions this quarter, as Tokyo sinks once again into complacency.
The U.S. recovery will be the major driver for the rest of Asia. Low U.S. inventories will stimulate a manufacturing revival throughout exporting Asia, and the strong dollar will bolster American demand for Asian goods. China will pull further ahead in the competition for U.S. investment and trade, siphoning investment away from the rest of Southeast Asia. More nimble countries like South Korea will look to take advantage of China's growth by increasing ties with Beijing. Even Taiwan will further test the waters of economic cooperation with China.
We therefore expect noticeable economic bounce-back in the second quarter -- with stronger growth as the year progresses, especially in China and South Korea, and some residual growth in Southeast Asia. This will be heavily driven by the United States, which will seek to take political advantage of its position. This may complicate economic developments. In Asia especially, the economies should not be separated from the political and military dimensions, particularly in the next quarter.
We expect Europe's sluggish growth to continue at least until the second half of the year. The European Central Bank did not cut interest rates sufficiently last year, and inflation concerns should rule out a cut in the second quarter. As painful as it may be, Europe also will rely on the United States to kick-start its economies, but that will take some time. Since some of Europe's problems are structural -- taxes, regulations, limits on entrepreneurial activity - we do not have high confidence in this strategy. As the ECB fails to take charge and with elections looming in France and Germany, the need for limited but effective national solutions will increase. At the same time, labor unions will continue to assault reforms, hampering the ability of European economies to surge. The outlier in this scenario is the United Kingdom, which will reap the benefits of its relative degree of monetary independence and post the strongest growth of any major EU economy in the second quarter.
Thus, we see the United States moving ahead, Japan continuing to wallow and Europe drifting. All of this changes, of course, if Japan unexpectedly collapses, if there is another major al Qaeda strike in the United States -- particularly using WMD -- or if oil prices rise sharply as a result of U.S. military action against Iraq or for some other unforeseen circumstance. Though we do not expect a Japanese collapse, the latter two scenarios are very real and could override any strictly economic predictions |
