Roach article on economic impact of SARS
The Global Double Dip
Stephen Roach (New York)
War, uncertainty, and disease are a tough combination for any economy. But for an unbalanced and vulnerable world, this confluence of shocks hurts all the more. For the industrial world as a whole, an economic contraction now appears to be under way. Moreover, we are adjusting downward our baseline estimate of overall world GDP growth for 2003 to 2.4% -- an outcome that would take the world economy through its official recession threshold of 2.5%. A global double dip may now be at hand.
The major economies of the developed world appear to have contracted in February and March. Not only is that true of industrial activity in the United States, Europe, and Japan, but most major barometers of service sector activity in these same countries are now flashing similar signs of weakness. Moreover, around the world, labor markets are softening, higher energy prices are sapping consumer purchasing power, and capital spending projects are being put on hold. And now Asia has been hit hard by the outbreak of a virulent new disease -- severe acute respiratory syndrome (SARS) -- that has brought tourism, travel, and entertainment to a virtual standstill in this once-resilient region. Yes, there is always a good deal of statistical noise in extracting meaningful information from month-to-month changes in any economy. In this instance, however, the data fit all too neatly with the script of a world in shock.
Nor should this dip be viewed as just a two-month statistical fluke that will end the moment that Baghdad falls. Our baseline forecast currently points to a world economy that is likely to record “zero” to slightly negative real GDP growth in the second quarter of 2003. For the current period, we are projecting outright contractions in Europe and Japan that could more than offset fractional growth in the US and elsewhere in the world. Moreover, with SARS-related disruptions hitting Asia exceedingly hard at the moment, the risks to our second-quarter estimate are decidedly on the downside. As the flow data comes in, we will, of course, adjust these estimates accordingly. As it stands today, however, our forecast of record paints a picture of a world economy that is likely to be exceedingly weak in the first half of 2003. Whether that weakness ultimately takes the form of stagnation or cumulative contraction is still an open question. But the bottom line is that we are debating degrees of weakness -- not strength -- for an already vulnerable global economy.
War, and the geopolitical uncertainties it has engendered, are the obvious and proximate causes of this global dip. Weather-related disruptions in the United States have probably compounded the problem. However, there are also more deep-rooted forces at work. The industrial world had come to a virtual standstill in the final months of 2002 -- long before war-related jitters took hold. GDP growth in the fourth quarter of 2002 had slowed to 1.4% in the United States, about 1% in Euroland, and 2% in Japan. With the exception of Japan -- where we believe the latest data point is spurious -- this paints a picture of a prewar industrial world that was inching ahead at a distinctly subpar pace. Such below-trend growth is the functional equivalent of what I have long referred to as the “stall speed” -- an anemic growth rate that is lacking the inherent resilience or cushion that would enable an economy to withstand the pressures of an exogenous shock. And as bad luck would have it, several such shocks have now hit. In the annals of business cycle history, the combination of the stall speed plus a shock is a lethal one -- it has almost always led to a contraction in economic activity. I have little reason to believe it’s any different this time.
Consistent with these concerns, we are cutting our baseline estimate of 2003 world GDP growth from 2.5% to 2.4%. Normally, I would not make much over a forecast revision of 0.1 percentage point. Given the accuracy of our data set, one can even question the statistical significance of such a small cut. But the point is more symbolic than anything else. We and others have long viewed 2.5% world GDP growth as the official recession threshold for the global economy. Prior to this latest cut, our baseline estimates depicted a world right on the cusp of renewed recession. This reduction now takes the world as a whole into the recession zone -- marking the second global downturn in three years. It’s a fractional breach of that threshold, to be sure. But I maintain the view that there could well be more to come on the downside of our revised global prognosis. In terms of world GDP growth, I continue to place those risks in the 2.0% to 2.5% range. Our most recent reduction still leaves us at the upper end of that range.
Our latest cut to global growth comes from a SARS-related reduction to our 2003 estimates for Asia ex Japan. Based on unmistakable signs of a sharp curtailment in tourism -- and the multiplier effects associated with such disruptions -- we have pared our pan-regional Asian growth estimate from 5.0% to 4.6%. As Andy Xie recently detailed, this reduction assumes a 60% decline in tourism over the next three months and a “normalization” thereafter; for the year as a whole, that would translate into a 15% reduction in Asian tourism (see his 1 April Global Economic Forum dispatch, “Asia Pacific: Downgrading GDP Forecast for SARS”). Andy concedes that the risks are skewed toward a much larger impact from SARS-related reductions. Tourism accounts for about 3-4% of Asian GDP, and Chinese tourists have accounted for an increasingly larger portion of such activity in recent years. With the Chinese now scared to travel and with Asian countries restricting the entry of Chinese visitors, SARS-related impacts could snowball quickly.
Don’t’ get me wrong. I do not want to give the impression that the world is now slipping into a SARS-led recession. There’s far more to the story than that. Yet SARS may well end up being the tipping point for an already vulnerable global economy that has also been hit by the twin shocks of war and geopolitical uncertainty. Unfortunately, the SARS effect is concentrated on Asia -- long the fastest-growing region in the world and the one area that essentially had been keeping the global economy afloat. To the extent that this source of global resilience is now being undermined by disease-related panic, an already bruised and battered global economy has little left to lean on. Had the world economy been growing more vigorously prior to the outbreak of SARS, this shock probably would not have made such a difference. Sadly, that’s not the case.
By definition, shocks always end. War is followed by peace. Destruction requires rebuilding. And disease can eventually be controlled, if not cured. It follows that post-shock relief is invariably the flip side of a shock-induced contraction in real economic activity. Look no further than events in the aftermath of the terrorist attacks of September 11 -- a brief freefall, which quickly gave way to a powerful snapback. Victory in Iraq will undoubtedly trigger a rebound in confidence that could well translate into a snapback in spending. But like the post 9/11 bounce-back, it, too, might be short-lived. Not only could any such rebound be constrained by lingering SARS-related impacts on Asia, but it may also be hindered by a global economy continuing to face stiff headwinds resulting from the persistent and mounting imbalances of a post-bubble US-centric world. Short-lived rebounds and lingering vulnerability of the global economy are a breeding ground for double dips. A shaky world now appears to be in the midst of just such a relapse. |
