Global: In Search of a New Global Growth Engine
by: Stephen Roach (New York)
Jan. 14, 2002
The latest views of Morgan Stanley Economists
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It’s never easy to break the vicious circle of a world in synchronous recession. Economies tend to feed upon one another as they lurch to the downside, with weakness reverberating from one region to another. That’s especially the case in the current global recession, perhaps the most synchronous one of all. What will it take to spark the transition to sustainable recovery in the broader world economy?
Before attempting to answer this question, it’s worth reviewing how the world got itself into this mess. The synchronicity of the current global recession reflects four key characteristics of today’s world economy. First, it is more connected by trade flows than ever before; by our calculations world trade currently accounts for a record 24% of world GDP -- well in excess of the 17% and 19% shares that prevailed in the synchronous global recessions of the mid-1970s and early 1980s, respectively. Second, the trade cycle has just gone through its most violent boom-bust transition on record; after surging by a record 12.4% in 2000, our latest estimates point to just a 0.7% increase in 2001 -- the steepest year-to-year-decline in recorded history. Third, the trade cycle has become unusually dependent on the IT cycle; the IT share of global trade surged by nearly 50% in the latter half of the 1990s. Fourth, the world is more US-centric than ever; our estimates suggest that the US economy may have accounted for as much as 40% of the cumulative growth in world GDP in the five years ending in mid-2000 -- essentially double America’s share in the world GDP, as measured by the IMF’s purchasing-power parity metric (PPP) metric.
Against that backdrop, it is not too difficult to see how the world ended up in synchronous recession. Just as the US led the trade- and IT-dependent global economy to the upside in the latter half of the 1990s, it has played the same role in driving the world to the downside. The catalyst was the extraordinary collapse in the US-centric IT cycle, which was perhaps the most globalized technological breakthrough the modern-day world economy has ever experienced. The collapse in IT demand quickly filtered through its Asian supply chain, taking that region into a steep downturn. A trade-dependent Euroland economy was hit especially hard by the subsequent weakening of Asian demand. New NAFTA linkages were quick to transmit collateral damage from America’s inventory correction to Mexico and Canada. And with Japan lacking in any self-sustaining impetus from domestic demand, the external shock brought about by the weakness in global trade was all it took to spark yet another recession in the Japanese economy. The virtuous circle of the late 1990s had turned exceedingly vicious.
The world faces a tough problem in breaking the vicious circle of synchronous recession; that’s because it is largely lacking in autonomous sources of domestic demand that could take the place of that abdicated by America. Europe is the closest alternative to a new global growth engine. But with structural reforms lagging and its policy levers hamstrung by inertia (monetary policy) and the Stability Pact (fiscal policy), the case for an autonomous euro-zone growth spark is a weak one. That’s especially the case with still relatively inflexible European labor markets now facing the pressures of high and rising unemployment -- a clear negative for the all-important consumer piece of domestic demand. Nor can the Euroland investment cycle be expected to do the job; although the region did not suffer from a US-style IT overhang, there’s little sign of a revival in business sentiment or profitability that might otherwise be associated with a quick rebound in capital spending.
Japan, the world’s second-largest economy, is hardly in a position to lead the world out of synchronous recession. In fact, the recent depreciation of the yen suggests that the Japanese authorities probably believe that a currency-assisted boost to external demand is the country’s only option at this juncture. That underscores the lack of any impetus that can be expected from domestic demand in Japan -- hardly surprising in a climate of record unemployment and a looming financial crisis. Yet a competitive currency devaluation is hardly an outcome that would benefit the world economy at large. It is a classic "beggar-thy-neighbor" tactic that would merely take market share from the rest of Asia and elsewhere in the global economy. In that important respect, Japan can be seen as a net drag on the remainder of the world.
Nor does the developing world seem likely to provide a spark to the global economy. Having dropped the ball on reforms, most developing economies are lacking in autonomous sources of domestic demand. Instead, they remain highly dependent on external demand as driven by the global trade cycle. And there’s hardly ground for encouragement on that front. Our latest forecasts call for just a 6.3% rebound in global trade in 2003 following two years of recessionary gains averaging only around 1% in 2001-02. Such an increase is decidedly subpar relative to the 10% gains in global trade that typically occur in a recovery. To the extent that an externally dependent developing world remains very much a levered play on the US-led industrial world, it’s hard to be enthusiastic about growth prospects in Asia excluding Japan or Latin America.
To be sure, there are some signs of bottoming increasingly evident in the Asian export cycle. That’s true of Taiwan, Korea, Malaysia, Singapore, and Thailand. But in all these cases, any signs of export recovery are showing up mainly as a "base-year" effect, with the rates of contraction simply moderating relative to depressed year-earlier levels. By Andy Xie’s estimates, excluding China, pan-regional exports should rise by 5.5% this year and 10.4% in 2003. That’s well short of the nearly 14% increase that usually occurs in a typical Asian export recovery. Such an anemic recovery in the Asian export cycle mirrors the subpar rebound we expect in the industrial world -- leaving this externally led region with little opportunity to spark recovery in the broader global economy.
China remains an important exception to trends in Asia and the broader developing world. When I was last there in late November, concerns were mounting that China was finally feeling the heat of a world in synchronous recession. While it had remained relatively unscathed by the downleg of the IT trade cycle, the post-September 11 shortfall in worldwide consumer demand appeared to be taking a toll on Chinese exports. Recent export data seem to refute that possibility. Chinese exports surged by +11.5% in the year ending December 2001, a distinct acceleration from the +0.1% increase (y-o-y) evident in October. With the hit to external demand less than I had expected, the government’s efforts to boost domestic demand through accelerated infrastructure spending and housing reform should now have a greater impact on overall Chinese GDP growth. While that’s a distinct plus for Asia, it’s not enough to make much a difference to the broader global economy. That’s because China is still a relatively small piece of the world economy -- presently accounting for only about 3% of world GDP valued at market prices. A decade from now, a rapidly growing Chinese economy could well be large enough to provide an autonomous growth spark to the world. But it is entirely premature to expect such a possibility in 2002-03.
And so, by default, the search for a global growth engine ends up back in the United States. I continue to believe the outcome of that search will be disappointing in 2002, especially if I’m right and America experiences a double-dip recession. But even if I’m wrong and the US recession is now over, it seems highly unlikely that the world will enjoy the type of American-led growth impetus it got accustomed to in the late 1990s. Three years ago, in the depths of world financial crisis, we made a very bullish call with our "global healing" scenario. In retrospect, that may have been the last hurrah for the great US growth engine. Until a new growth spark comes along, it may be tough sledding for an engineless global economy. |
