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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (83564)	6/23/2002 2:30:33 PM
From: Nancy	Read Replies (2) \| Respond to of 99280

zeev, stephen roach of morgan stanley on global and u.s. economy - the current deficeit and its effect ... Jun 21, 2002 Global: Global Risks Are Mounting United States: Flight to Quality -- A New Range for Treasuries Euroland: Lowering the Incentive to Free-Ride Japan: Captial Shortage Update -- 1 First Street Europe - All: The "Euro Economy" Asia Pacific: Liquidity Continues to Decline Global: Global Risks Are Mounting Stephen Roach (New York) Suddenly, the world is tipping again. Geopolitical tensions remain at the boiling point, and recovery in the global economy looks shaky, at best. Meanwhile, financial markets are seizing up in the industrial world, and crisis is the only word to describe conditions in Brazil that are rapidly spreading to other Latin currencies. All this is starting to seem reminiscent of the dark days of late 1998 and early 1999. Yet there’s one key difference: America is not in any position to save the day by administering the tonic of global healing that worked so well three years ago. That puts the global outlook in an exceedingly difficult light. The news flow on the state of the global economy is simply terrible these days. US consumption growth seems to have sagged through the critical 2% threshold in 2Q02 -- underscoring the distinct possibility that the over-extended American consumer may simply be incapable of carrying the global economy for much longer. French consumer spending plunged in May and Italian business confidence sagged appreciably in June. I am just back from nine days in Europe and I can assure you there’s nothing vibrant in Euroland these days -- work stoppages are mounting by the day and intra-EMU squabbling is on the rise. Nor are there any signs in Japan that that the 1Q02 growth pop is sustainable; a 1.5% plunge in its service economy in April (the so-called tertiary index) is painfully consistent with the caution that our Japan team has long expressed on the state of the real economy. Non-Japan Asia is also showing signs of running out of steam. Courtesy of a powerful US inventory dynamic, the region got off to a solid start early this year. But sustainable recovery in this still externally-led region needs more than just a US inventory cycle. The lack of follow-through on the final demand front remains especially worrisome in that regard. The recent cuts we have made in our global trade forecast for 2002-03 underscore those very concerns (see my 21 June Global Economic Forum dispatch, "Lowering Our Sights on Global Trade"). Korea stands largely alone in Asia in shifting its growth dynamic to domestic demand -- although Daniel Lian has stressed similar efforts are under way in Thailand. But as Andy Xie, has argued, Korea’s consumption boom may well have backfired. Household debt has exploded by 33% over the past year and a bubble has emerged in the Seoul property market; at the same time, the Korean trade account swung into deficit in the first 20 days of June -- capping off a long erosion from the 12.7% surplus (as a share of Korean GDP) in 1998. In response, the central bank of Korea has begun to tighten ahead of this fall’s elections -- raising the distinct possibility that the country’s experiment with consumer-led growth is nearing an end. Moreover, borrowing a page out of the script of the early 1990s, trade conditions have also deteriorated elsewhere in Asia -- especially in the Philippines, Thailand, and even Singapore. And so, once again, it all hinges on the ability of the once-proud American growth engine to save the world. That could turn out to be the biggest disappointment of all. That’s because the United States now has the "mother of all" current account deficit problems -- an external imbalance that will inhibit America’s ability to fuel global recovery of a still US-centric world. The just-released 1Q02 US current account data underscores this dilemma. The $112.5 billion deficit -- or $1.25 billion per day -- amounted to 4.3% of US GDP. That’s slightly worse than implied by our baseline forecast (4.2%) and well on a path to pierce the all-important (i.e., ominous) 5% threshold by year-end 2002. At the same time, I note with interest a May US budget deficit of $81 billion, literally three times the shortfall of a year ago. Gone are the days when Federal saving would offset the lack of saving in the private economy. America is as saving short as ever --little wonder it needs foreign capital inflows to fund it. If anything, that suggest pressures on an ever-expanding current-account deficit can only intensify in the months and quarters ahead -- that is, unless the US finally starts to rein in the excesses of its own domestic demand. Therein lies the dilemma for the world. Back in the crisis days of late 1998, America’s current-account deficit was "only" 2.7% of GDP. While most of us thought that was high at the time, in retrospect, there was considerable scope for further expansion as the US stepped up and led the world into a glorious recovery that we dubbed "global healing." That’s right, it wasn’t all that long ago, that we were the out-of-consensus bulls on the global economy. But now the tables have turned. The global healing of 1999 saw America’s current account deficit expand by two full percentage points of GDP over the subsequent two years, hitting an all-time record of 4.6% in the year 2000. A two-percentage point widening from today’s level would push the external imbalance up to 6% of GDP -- requiring financing via capital inflows of close the $2 billion per day. I am not saying that can’t and won’t happen. But it is ludicrous, in my view, to ignore the obvious and important consequences of a sharp further widening of America’s gaping current account deficit -- should it occur. The once-high-flying dollar will bear the brunt of such an imbalance, and that realization now seems to have sunk in with a vengeance in foreign exchange markets. But other US asset markets could also be affected -- a possibility that is hardly being lost on the beleaguered US stock market. But the weakness of the dollar puts the world on notice that the old days of US-centric growth are over. The flip side of that outcome is that the euro- and yen-blocs are going to have to learn to live with stronger currencies. And with these still externally-dependent regions lacking in domestic demand, their life is about to get considerably more difficult. That’s a far cry from the magnanimous climate of global healing of three years ago. This time, as the outbreak of global trade tensions also seems to indicate, it’s every country for itself! It’s crunch time for the old recipe of US-centric global growth. What worked so brilliantly for the past seven years seems unlikely to do the trick this time. Global risks are mounting and there may be no easy way out for world financial markets.