Global: In Limbo
Stephen Roach (New York)
Morgan Stanley
Apr 28, 2003
A sluggish global economy is essentially spinning its wheels as it
fends off one shock after another. No sooner was the war over,
when SARS reared its ugly head. Without a cushion of resilience,
these shocks can do much greater damage to underlying economic
activity. At a minimum, they inhibit the pace of cyclical recovery.
They also have the clear potential to trigger a more serious
recessionary relapse. For financial markets now banking on the
likelihood of cyclical revival, I continue to believe that the risks
remain skewed decidedly to the downside.
The best I can say about the state of the industrial world is that the
current state of economic conditions is not quite as bad as we had
expected. That’s especially the case in Europe. The tone of the
latest euro-zone business surveys has remained weak at the start of
the spring quarter. At least, that was the message from the first
tallies of April, especially from Italy and Belgium; the all-important
German Ifo survey (due out April 28) will provide an important
reality check on this trend. However, the incoming 1Q03 flow data
of actual Euroland activity contained modest upside surprises in
both Germany (manufacturers’ orders and production in February)
and France (consumption of manufactured goods in March). This
hints at a Euroland economy that is now tracking slightly above our
current forecast of a fractional decline in 2Q03 GDP.
A similar pattern has been evident in Japan. Incoming data on
private consumption and business capital spending point to
fractional increases in 1Q03; that suggests the Japanese economy
is running slightly above our forecast of a -0.2% (QoQ) decline in
real GDP. Nevertheless, our Japan team continues to raise
considerable doubt about the staying power of such resilience.
That’s especially true for the Japanese consumer, where spending
propensities continue to rise -- up 5.2 percentage points in the year
ending March 2003 -- and saving propensities continue to fall.
Meanwhile, with the jobless rate back on the rise and the ratio of
job offers to applicants having declined in March, all signs point to
a renewed erosion of income support for the Japanese consumer.
Nor is the US economy exactly springing back to life. Statistical
bounce-backs in retail sales and manufacturers’ orders are mildly
encouraging, as was an expected postwar rebound in consumer
confidence. But the US labor market remains weak, as
underscored by persistently elevated trends in the jobless claims
data through mid-April. Moreover, while the 1Q03 GDP report is
considered “old news” by now, it underscored the lingering fragility
of the US economy. A relapse on the capital spending front
following a fractional increase in 4Q02 was especially
disconcerting, as was ongoing sluggishness in consumer demand.
Domestic final demand increased at just a 1.2% annual rate, the
most anemic increase since the final period of the last recession
(3Q01). Looking through the noise, our US team still sees GDP
growth tracking no faster than 1% in the current period -- an
outcome which would mark the third consecutive quarter of
sub-2% growth.
All in all, the conclusion on the industrial world is hardly uplifting.
While the state of activity is a little “less worse” than we had been
expecting, the major economies of the world are, at best, holding
to a 1% growth trajectory. That’s consistent with what I have long
referred to as the “stall speed” -- a sluggish growth rate that has
downside risk written all over it. Lacking a cushion that would
shield it from ever-present exogenous shocks, the recent outbreak
of such shocks is all the more disturbing -- first, the war in Iraq and
its attendant geopolitical uncertainties and now SARS. Of these
various shocks, SARS seems to be the most disruptive insofar as
its impact on the global economy is concerned. In part, that’s
because the war in Iraq didn’t really turn out to be the full-blown
shock we feared. In retrospect, we saw it coming last summer,
when the American troop build-up in the Middle East commenced.
While there was always reason to hope that hostilities could be
avoided at the last minute, the likelihood of war had become
factored in to consumer and business expectations and had also
been discounted in world oil markets. The real shocks would have
been the long-war or the no-war alternatives.
SARS is a different matter altogether -- an unexpected shock that
has the real potential to disrupt both Asia as well as the broader
global economy. True to the strict definition of a shock, it is
impossible at this point in time to assess the full implications of the
rapidly unfolding SARS outbreak. We have already made one cut
to our Asian growth estimates for 2003 -- taking our pan-regional
forecast of Asia ex Japan down to 4.6% from 5.0%; this reduction
also prompted us to lower our estimate of world GDP growth in
2003 to 2.4%, which technically takes the global economy into
recession territory (see my April 4 essay, “The Global Double
Dip”). As SARS now spreads, the risk is that we will have to make
additional cuts -- not just to Asia but also to the rest of the world.
The first-round impacts on Asia could be enough, in and of
themselves, to make a real difference for an already sluggish global
economy. They eliminate the one source of global resilience that we
and others have been counting on to keep the world economy
afloat. With the industrial world in the stall-speed zone, the impacts
of Asian growth shortfalls loom all the more significant for the
broader global economy. SARS-related growth shortfalls could
well be the tipping point that takes the world into its second
recession in three years.
As the most trade-intensive region in the world, shortfalls in Asian
growth have the clear potential to exact collateral damage on the
region’s major trading partners, especially Europe and the United
States. For example, China plus the newly industrialized Asian
economies of Korea, Taiwan, Singapore, and Hong Kong
currently account for about 14% of America’s total goods exports,
or about 1% of total US GDP. Inasmuch as this share has been
rising sharply in recent years, the potential impact of a slowing of
Asian demand on the US economy can’t be taken lightly. The
longer SARS-related disruptions persist, the greater the chance
that these global multipliers will kick in.
All this raises a big question mark in my mind as to what will lift the
global economy in the second half of 2003. Given the absence of
demand growth outside the US, I continue to believe that it all boils
down to the US growth prognosis. And here the issues are pretty
much the same as those we have been debating for some time --
namely policy traction, the state of pent-up demand for American
consumers and businesses, the job market, and oil prices.
The bulls on the economy will tell you that an unleashing of postwar
animal spirits, in conjunction with sharply lower oil prices, will
finally enable the policy lags to kick in. By contrast, I continue to
maintain that America’s post-bubble headwinds -- especially
record private sector indebtedness, a massive and ever-widening
current-account deficit, and a national saving rate that has plunged
into uncharted territory -- will continue to mute policy traction and
thereby inhibit growth in the US economy. Increasingly treacherous
global conditions could well reinforce the downside in the US. Our
baseline forecast already has the world economy in double-dip
range for 2003. I would currently place about a 40% chance on a
similar such outcome in the US before the end of this year.
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