Stephen Roach... walking tall and making some very valid points...I guess we are lucky he's not giving the concept
of Increased productivity another working over.
John
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"Global: Ground Zero
Stephen Roach (New York)
From Morgan Stanley's Steven Roach 8/24/01
The major economies of the world came to a virtual standstill in the second quarter of 2001. It was a rare, synchronous growth compression, the likes of which, hasn’t been seen since the aftermath of the first oil shock in the 1970s. With the global economy now effectively at "ground zero," the world growth dynamic is truly engineless -- making the case for spontaneous recovery a real stretch. Does this stalling suggest that the worst is over, or that it has merely just begun?
There can be no mistaking the notable absence of growth in the three largest economies of the world -- the United States, Japan, and Germany. While the US economy was initially reported to have eked out a 0.7% annualized increase in real GDP in 2Q01, more recent data point to a downward revision into fractional negative territory. Our estimate of a downwardly revised -0.2% drop (to be released 29 August) would mark the first outright decline in US real GDP since the drop of 0.1% in 1Q93. At the same time, our Japan team has recently updated its estimates for economic growth in the second quarter and now looks for an annualized decline of 3.8% (to be released 7 September). Germany’s latest economic report rounds out the saga, with the government just reporting that real GDP growth came in at "zero" in the spring period. For Euroland as a whole, our 2Q01 growth estimate is a mere +0.1% (q-o-q). Maybe it’s a coincidence, but in the spring of 2001, economic growth suddenly became a very scarce commodity.
All this is not to say that there are no rays of hope. As always, the inventory cycle will work its time-honored magic. The question is, when? Once liquidation has gone far enough, production must invariably be raised in order to stabilize stocks at reduced levels. Elga Bartsch argues that the latest German GDP data contain good evidence of that very phenomenon, with a sharp downward revision to the inventory statistics indicating that Corporate Germany has made surprisingly good progress in working off its overhang of unwanted stocks. That, together with a rise in the July Ifo survey of business confidence, bodes reasonably well for an improved pace of German activity in the second half of this year.
In the United States, Dick Berner argues that it’s too early to look for the upside of the inventory cycle. While about half the downward revision we expect to 2Q01 GDP should be inventory related, outright liquidation of stocks, in our view, appears to be far from over. Inventory-to-sales ratios, the most accurate metric of stock balance, actually moved up further in June and remain well above year-earlier levels. With sales still falling faster than production, especially at manufacturing and wholesalers, the modest liquidation has not been enough to bring the inventory cycle to a head. That means that de-stocking has probably not gone far enough in the United States. As a consequence, any production snapback is likely to come later rather than sooner.
Nor is there much evidence that the Japanese inventory cycle is nearing a turning point. On the surface, the recent collapse of Japanese industrial production -- with June down 0.7% (m-o-m) and 2Q01 down 4.0% (q-o-q) -- points to progress on the inventory clean-up front. Production has, in fact, fallen short of expectations for twelve months in a row. However, with Japanese sales and shipments in a state of protracted weakness, Takehiro Sato of our Japan team doesn’t believe that inventories and sales will be in balance for another couple of quarters. In his view, that suggests that any meaningful recovery in Japanese industrial production is at least three or four quarters away.
In the end, of course, there will have to be a good deal more to any global growth revival than the mechanistic uncoiling of the inventory cycle. Unless de-stocking overshoots dramatically to the downside -- hardly likely in this era of increasingly sophisticated inventory control technologies -- then production growth will be largely demand driven. So far, the downside of the global inventory cycle has been dominated largely by an abrupt about-face in IT-led capital spending. But there is risk of s second stage to this dynamic -- one dominated by the downside of the global consumer. If, in fact, the impetus to global demand weakness now shifts from capital spending to the consumer, then all bets would be off.
That puts the burden of global recovery almost exclusively on the back of the American consumer. That could be a tall order. Normally, consumers are the first to fall in the downleg of a business cycle. Capital spending is what economists call a derived demand -- one that rises and falls in response to demand conditions elsewhere in the economy. This time around, there has been a striking role reversal -- capital spending has been on the leading edge of the global downturn, and consumers have formed the last line of defense. The key question for the global economic outlook is whether those defenses can now hold.
With corporate profit margins and earnings still under excruciating pressure, I have my doubts. As businesses cut costs in response to the unrelenting earnings carnage, the consumer will hardly be an innocent bystander. Through the combination of layoffs and compensation adjustments, workers will get intimately involved with business cost-control efforts. The American consumer is not likely to be well insulated from those efforts. Saving rates remain at post-World War II lows. Debt ratios remain near record highs, although Dick Berner notes early signs of relief on this front. And the equity wealth effect has clearly reversed course after six fat years. Sure, tax rebate checks are in the mail. But against the backdrop of a looming deterioration in job and income expectations, together with ongoing balance-sheet pressures, demand support from the American consumer can hardly be taken for granted.
The bottom line is that ground zero may not represent a classic turning point for the global economy. Instead, it may be more symptomatic of a world that has merely begun a bottoming process. Moreover, barring the upside of the inventory cycle and allowing for the possibility of another downleg on in global demand -- this one coming from the consumer -- there is good reason to believe that any bottoming may be surprisingly prolonged, or even short-lived. I continue to believe that the world is in the midst of a wide-bottomed U-shaped business cycle. The good news is that all U’s eventually end on the upside. The bad news is that a drawn-out U feels like the dreaded L for as long as the economy bounces along the bottom. Unfortunately, now that it has hit ground zero, this global economy may have only entered the early stages of an extended U." |
