Global: Shoulder to Shoulder with the IMF
Stephen Roach (New York)
Morgan Stanley
Apr 11, 2003
There aren’t too many of us in the global forecasting business
anymore. That’s a real pity -- especially with the world economy in
such a shambles these days. But the International Monetary Fund
-- long the official arbiter of the world’s GDP -- has just come out
with its latest update. It provides an important cross-check on our
own prognosis of a world in distress.
The IMF has just slashed its estimate of world GDP growth in
2003 to 3.2% -- a cut of 0.5 percentage point from the 3.7%
forecast of record made last September. The revisions were largely
concentrated in the industrial world. The European prognosis was
pared the most -- from 2.3% to 1.1%. But the IMF also lowered
its numbers for the United States (from 2.6% to 2.1%) and Japan
(from 1.1% to 0.8%). In the developing world, the IMF’s cuts
were mainly evident in Latin America, where their 2003 estimates
went from 3.0% to 1.5%. By contrast, in developing Asia, growth
estimates were left unchanged at a vigorous 6.3%.
In official circles, a cut of 0.5 percentage point off an annual
estimate for world GDP growth is a big deal. But, in my view, the
IMF’s latest cuts aren’t nearly big enough. Our current -- and also
downwardly revised -- forecast calls for world GDP growth of
2.4% in 2003. That’s fully 0.8 percentage points below the IMF’s
just-released estimate. But it’s not only the numerical difference
that matters; these forecasts each depict a very different character
of the global economy. The IMF’s 3.2% global growth estimate
portrays a decided subpar growth trajectory, with world GDP
growth estimated to be 0.4 percentage point below its 3.6%
longer-term (post-1970) trend. By contrast, our latest estimate
takes the world economy technically into the recession zone -- just
piercing the 2.5% growth threshold normally associated with global
downturns. To be sure, neither forecast depicts any vigor in the
world economy. But our view certainly emphasizes the perils that
lurk on the downside.
The bulk of the difference between us and the IMF can be
traceable to two areas of the world -- Asia ex Japan and Europe.
In Asia, the IMF is still carrying a 6.0% growth estimate for 2003,
well in excess of our downwardly revised 4.6% prognosis. With
this region accounting for fully 26.3% of world GDP as measured
on a purchasing-power-parity basis, the Asian forecast difference
accounts for fully half the total gap between our view and the
IMF’s for 2003. Not surprisingly, the IMF does not appear to
have made any modifications of its Asian growth estimates to
reflect the impact of SARS -- severe acute respiratory syndrome.
By contrast, we recently knocked 0.4 percentage point off our
2003 Asian growth forecast to reflect a sharp SARS-related
reduction in tourism in these tourist-intensive economies. With
tourism, travel, entertainment, and a variety of other key service
activities (i.e., retailing) having come to a virtual standstill in this
once-resilient region, I am certain the IMF would have made a
similar adjustment had they gone through their forecast update a
couple of weeks later. Nevertheless, our pre-SARS view of Asia
appears to have been somewhat weaker than the IMF’s -- mainly
reflecting more cautious forecasts of the so-called newly
industrialized economies (NIE) of Asia (Korea, Singapore, Hong
Kong, and Taiwan). This difference appears traceable mainly to
our heightened concerns over a more cyclical outcome for the
global trade cycle -- a big deal for trade-intensive Asian NIEs.
For Europe, there is less of a disparity. Our latest forecast for
0.8% GDP growth in the euro area for 2003 is 0.3 percentage
point below the IMF’s 1.1% forecast. The bulk of the difference
shows up in Germany -- Europe’s largest economy, accounting for
fully 28% of pan-regional GDP; our prognosis for “zero growth” in
Germany this year is 0.5 percentage point below the official IMF
outlook. While IMF can hardly be accused of having an upbeat
view of Germany -- the industrial country it judges to be next in line
for deflation after Japan -- it does appear to be somewhat more
upbeat on the prospects for private consumption than we are.
Subdued inflation is expected to provide a bit more of an assist to
household purchasing power.
I do not want to make a big deal out of the differences between
our global forecast and that of the IMF -- especially since the very
recent outbreak of SARS may well account for close to half the
disparity. Instead, I would rather stress the similarities -- especially
the qualitative concern that IMF expresses over the precarious
state of the global economy. I have long stressed two
macro-analytic flaws in the current state of the world economy -- a
US-centric global growth dynamic and a post-bubble shakeout in
the US economy. In warning of the downside risks to its
downwardly revised global outlook, the IMF stresses the interplay
between those same concerns. In particular, the IMF warns of the
severe repercussions of outsize disparities in external imbalances --
America’s gaping current-account deficit, on the one hand, and the
surpluses of Asia and Europe, on the other. With the US budget
situation deteriorating rapidly, the IMF fears a further widening in
the US current-account gap and concomitant downward pressures
on a still overvalued US dollar. I couldn’t agree more.
Unfortunately, these are the very issues that investors, politicians,
and even most policy makers simply want to ignore. Like former
US Treasury Secretary Paul O’Neill, most want to believe that it’s
actually a good thing if a US-centric world draws increased
support from America’s massive and ever-widening
current-account deficit. In the world according to O’Neill, that is
simply a manifestation of a seemingly insatiable demand for
superior returns from dollar-denominated assets. The “O’Neill”
effect is premised on the notion that America’s current-account
deficit is an unavoidable by-product of its capital-account surplus.
Unfortunately, nothing could be further from the truth. In my view
-- and one also emphasized by the IMF -- the record US
current-account deficit is nothing to gloat over. It reflects two key
flaws of a dysfunctional world: the needs of a saving-short US
economy to fund investment by importing foreign saving, and the
lack of any vigor to domestic demand growth outside of the United
States. The final twist in this saga is the very recent and dramatic
deterioration in the US budget deficit -- a shift toward further
domestic “dissaving” that could well lead to a sharp further
widening of America’s already massive external imbalance.
Economic history is utterly devoid of examples of large and
ever-widening current-account deficits -- for any nation. Therein
lies the major pitfall for a dysfunctional global economy. I couldn’t
agree more with the IMF on that key point.
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