Let's see what Stephen Roach has to say this week:
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Global: Synchronization and the Global Trade Cycle
Stephen Roach (New York)
Synchronous global recessions don’t offer an easy way out. Contractionary forces reverberate from one country to another -- in effect, feeding on themselves through the cross-border connectivity of trade flows, capitals flows, and the trans-national activity of multinational corporations. With this arguably being the first true recession in the modern day era of globalization, the world’s synchronicity could well be decisive in shaping the coming economic recovery.
Unfortunately, the news is not good on this front. Once again, we are downgrading our estimates of global trade. Specifically, we are cutting our 2001 estimate of the growth in global trade volumes in goods and services to +0.7% (from 1.4%), and we are pruning our 2002 forecast to +1.3% (from 3.4%). In both cases, our new estimates are well below the global consensus, as usually approximated by IMF forecasts. Over the 2001-02 interval, the IMF is now projecting (based on its 13 November update) average gains in world trade volumes of 2% -- essentially double the 1% pace we are projecting over the same period. If our forecast comes to pass, it would mark the weakest two consecutive years of global trade growth on record. Moreover, as I have stressed for some time, the downshift in 2001 represents the sharpest ever one-year transition from boom to bust in the global trade cycle -- a deceleration of 11.7 percentage points from the record 12.4% increase of 2000.
With the global economy more dependent on trade than ever before -- world trade currently stands at a record 24% of world GDP -- the dramatic compression in the trade cycle has quickly spread around the world. This new contagion has resulted in what could well go down in history as the world’s most lethal synchronous recession.
It is interesting to compare the current downturn in the trade cycle with earlier synchronous recessions in the world economy. In 1975, world trade actually contracted by 2%, the steepest annual decline in recorded history. At work in that instance was the first global oil shock, which hit all major nations in the industrial world with a vengeance.
In 1982, there was a fractional decline of about 0.5% in world trade, only the second instance in the past 30 years when trade volumes actually contracted. The culprit in this instance was America’s deepest recession of the post-World War II era and the collateral damage it sparked elsewhere in the world. In contrast with these two earlier synchronous recessions, we are not projecting an outright contraction in global trade in either 2001 or 2002. However, that does not temper the impact of the current trade shock. In both of the earlier synchronous recessions, the compression in the global trade cycle emerged far more gradually than has been the case in 2001. In the mid-1970s, pre-recession trade growth was around 6% in 1994. And in 1981 it was only about 2.5%. As noted, in 2000 it was a record 12.4% increase that preceded the anemic gains we now estimate for 2001. There can be little doubt of the shock effect of the current about-face in the global trade cycle. Shocks and recessions always seem to go hand in hand.
The shifting mix of the current global trade cycle is also of great significance to the world economy. There have been two distinct phases to the downturn -- the first dominated by the downside of the global IT cycle. This was very much an American-led phenomenon, where business spending on IT (in current dollars) contracted by 13.1% in the year ending 3Q01, a dramatic reversal from the +16.5% annualized comparison of a year earlier. Recent IMF research leaves little doubt of the powerful role that IT played in driving the global trade cycle to the upside in the latter half of the 1990s
. The IT share of world trade rose from 7.5% in 1990 to 11% in 1999, nearly a 50% increase. As the US-dominated IT cycle rolled over, global trade adjusted with equal force on the downside. Asia has borne the brunt of these adjustments -- not surprising in light of the region’s role as an IT outsourcer. IT now accounts for more than 20% of total exports of both non-Japan Asia and Japan, more than double the share in the United States and triple the portion in Europe. Among those hit hardest by the first phase of the downturn in global trade have been Taiwan, Korea, Singapore, Hong Kong, and Malaysia.
But, now, a second phase of the downturn in global trade is under way -- driven largely by the long-awaited downshift of the American consumer. After averaging more than 4% during the latter half of the 1990s, growth in US consumer demand has slowed to about a 2% annual rate in the final three quarters of 2001. This has added new impetus to the downside of the global trade cycle, involving those countries that have greater exposure to the consumer demand cycle. China is the most notable example, where consumer products make up about 50% of its exports -- three to four times the average elsewhere in Asia. As the downside of the global trade dynamic shifts from being IT- to consumer-led, the cross-border contagion of the synchronous global recession can only intensify.
Trade linkages, of course, are not the only means of cross-border connectivity in this synchronous recession. Also at work is the trans-national integration brought about by foreign direct investment (FDI). Increasingly tight correlations across world equity markets bind economies together, as well. But in my opinion, the trade cycle is now the major transmission mechanism of global synchronicity. FDI trends are far more stable than the world business cycle. And apart from America and its significant wealth effect, the ups and downs of cross-border portfolio flows seem to have little lasting impact on real economic activity. Of all of the avenues of cross-border connectivity, the trade cycle has shifted the most dramatically as the world has toppled into recession. I would put global trade right at the top of the list in explaining the synchronicity of the current global business cycle.
The seemingly unrelenting reverberations of cross-border contagion make it exceedingly tough to break the vicious circle of a synchronous global recession. As always, the authorities are dealing with the global business cycle in nation-specific terms. Implicit in this approach is the old axiom that the best global policy is none other than the sum of the best national policies. Yet it may well be that this approach is outmoded -- that a synchronous worldwide recession requires greater policy coordination among nations than was the case in the asynchronous world of the past. Suffice it to say, other than moments of real crisis -- such as in the fall of 1998 -- the authorities have never looked favorably upon such joint efforts. This potential disconnect between the increased synchronicity of the world economy and the lingering asynchronicity of policy responses hardly adds comfort to the business cycle call. To break the grip of this lethal synchronous recession, the authorities may have to be forced into a new collectivism. |
