... J.T. ... to at least try to maintain some intellectual respect here (assuming I had an intellect to be respected ... <g>), I must note that Stephen Roach has been more bullish recently, and especially today ... his quick change in direction does make me wonder somewhat whether Morgan Stanley dictated that he get more back in line with his staff (which has been much more bullish for the last 24 months, and completely wrong) or whether he came to his more bullish conclusions on his own ... though I am still still wondering about the true reasons for his change in direction, I will accept it for what it is ...
Ken
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December 09, 2002, Morgan Stanley's Global Economic Form
Global: The Global Economy in 2004 - Back to Trend (Barely)
Stephen Roach (New York)
This is the time of the year when we stretch our collective imagination and peer another year into the future. Our first look at the world in 2004 points to a gradual improvement in the pace of global growth following two years of recession-like outcomes in 2001-02 and an anemic recovery in 2003. But it’s an improvement that barely gets the global economy back to its long-term trend rate of growth -- a most disappointing recovery by cyclical standards of the past. And it’s a recovery call that we make with considerable trepidation, for it perpetuates many of the imbalances that have built up the US-centric global economy over the past decade.
Our forecast for world GDP growth in 2003 remains unchanged at 3.0% -- a modest improvement from average gains of 2.1% estimated over the 2001-02 interval. By way of comparison, anything below the 2.5% global growth threshold is generally considered to be a recession in the world economy. By that metric, we reckon next year will mark the first year of recovery from a two-year global recession. Our first cut at 2004 calls for world GDP growth to accelerate further to 3.9%, fully 30% faster than gains estimated for 2003 and, in fact, the fastest year of global growth in four years. While seemingly vigorous by comparison with gains in recent years, our 2004 prognosis hardly qualifies as a year of rapid growth; that’s especially true when judged against the world economy’s trend rate of growth that has averaged 3.6% since 1970. Our initial estimate for 2004, therefore, can be characterized as only fractionally above trend -- symptomatic of a global economy that continues to struggle after three of the most anemic years of growth on record.
The mix of global growth is projected to remain decidedly US-centric through 2004. Growth in the US economy is expected to accelerate to 3.9% in 2004, a marked acceleration from subpar gains of 2.5% over the 2002-03 interval. Powered by a solid capital spending dynamic, the projected rebound in 2004 represents what Dick Berner believes will be the first year of legitimate cyclical recovery following the mild recession of 2001. This outcome is comparable to the lackluster cyclical recovery of the early 1990s, when two years of subpar gains averaging 2.8% in 1992-93 were followed by a 4.0% rebound in 1994.
By contrast with the US prognosis, growth elsewhere in the industrial world is expected to remain subpar, especially when compared with the cyclical vigor that normally occurs in the aftermath of a recession. Europe is a case in point, with a projected 2.6% increase in 2004 qualifying as a disappointing rebound in the aftermath of three years of 1.3% average growth. The combined impacts of "fiscal drag" and lingering structural impediments, especially in euro-labor markets, generate powerful headwinds that are expected to constrain the European growth dynamic. As for Japan, average gains of just 0.5% over the 2003-04 interval underscore the seemingly chronic dilemma faced by the world’s second largest economy – an unwillingness to get on with the heavy lifting of financial sector reforms and the associated restructuring of nonfinancial corporates. All in all, we expect industrial world GDP growth to accelerate to just 2.9% in 2004 -- a significant rebound from average gains of 1.7% over the 2002-03 interval but, nevertheless, a meager cyclical recovery when compared with standards of the past.
In the developing world, GDP growth is expected to hit 5.3% in 2004, a marked acceleration from average gains of 4.1% over the 2003-04 interval. As has been the case for the past several years, domestic demand continues to lag in the developing world; as such, the growth dynamic in this segment of the world remains decidedly export-led. China continues to lead the pack, with its GDP growth expected to reaccelerate to 7.9% in 2004 after average gains of 7.5% in 2002-03. Elsewhere in Asia, the acceleration is expected to be more muted. Excluding China, growth in Asia ex Japan is expected to hit only 4.6% in 2004, only a slight pick-up from average gains of 4.1% in 2002-03. Growth in Latin America is expected to pick up to a 4.1% rate in 2004, a dramatic acceleration from average gains of just 0.4% over the preceding three years, 2001-03. A post-crisis snapback in Argentina is expected to account for the bulk of the rebound; gains elsewhere in the region are expected to remain little changed from the pace of 2003-03. Growth in emerging Europe is expected to pick up to 4.3% in 2003 following two years of 3.5% growth in 2002-03; gains in Russia (4.6%) and Turkey (5.0%) are anticipated to lead the way.
Inflation should remain dormant over our forecast horizon. The industrial world CPI is expected to inch up fractionally to just 1.8% in 2004, following average gains of just 1.5% in 2002-03. If this forecast comes to pass, it would mark the first time in half a century that industrial world inflation held below the 2% threshold for three consecutive years. While such subdued price pressures still stop short of outright global deflation, the risks, in my view, remain very much skewed in that direction. Three forces are at work -- the first being the cyclical pressures of a still wide global "output gap." Second is the lingering excess capacity sparked by the bubble-induced surge of capital spending in the late 1990s. And third are the powerful forces of globalization -- increased global supply in goods and services, alike, exerting ever-powerful impacts on pricing leverage in increasingly open economies around the world. In the subdued global growth climate we envision through 2004, aggregate demand growth will remain sluggish, at best -- insufficient to outweigh the persistent excesses on the supply side of the equation. For that reason, alone, deflationary risks can hardly be expected to vanish into thin air -- despite our expectations of increasingly aggressive reflationary policy actions by monetary and fiscal authorities around the world. The jury is out, in my view, on the key issue of policy traction at low levels of inflation and nominal interest rates.
The persistence of potentially destabilizing outsize global imbalances is yet another key risk to our macro scenario. Another burst of US-led global growth can only exacerbate an already massive US current account deficit. According to Dick Berner’s baseline forecast of the US economy, the current account deficit as a share of GDP is expected to remain above 5% through 2004. If anything, the risk is that America’s external gap will be a good deal larger than the 5.3% bogey we are projecting for year-end 2004. After all, a US-led recovery in the global economy now commences with America’s current-account deficit anchored at 5.0% in 2Q02. While we are building in a 7% average decline in the trade-weighted value of the dollar over both 2003 and 2004, this "soft-landing" of the greenback hardly seems sufficient to turn the tide on import penetration for a US economy that is far more open than ever. Nor does the gentle downward trajectory of the dollar seem likely to boost US exports to a world that remains on a decidedly sluggish domestic demand trajectory. Our baseline case is notable for the absence of any progress in America’s long overdue current-account adjustment. Yet history is utterly devoid of examples of such persistently large external imbalances. This underscores the ever-present risk of either a crash-landing in the dollar or a more dramatic realignment in the mix of global growth away from the US and back toward the rest of the world. In my view, the greater of the two risks continues to lie with the dollar.
Meanwhile, the very fabric of globalization is being subjected to its sternest test ever. As the global economy continues to underperform, cross-border tensions are mounting. As the specter of deflation goes global, the risk of competitive currency devaluations is rising. Japan has fired the first salvo in that regard, but there are whispers coming from the American side as well (see my 6 December dispatch, "The Perils of Competitive Currency Devaluations"). At the same time, the search for a scapegoat is on and fingers are increasingly – and unfairly, in my view – being pointed at China. Moreover, trade frictions are mounting, global terrorism remains an ever-present threat, and the possibility of a US-led war in Iraq continues to cloud the outlook. Yes, thanks to the Internet, the world may be shrinking in one sense. But macro and geopolitical tensions are very much on the rise.
Forecasting remains more of an art than a science, in my view. That’s especially the case in today’s unique macroclimate. I remain highly suspicious of forecasts based on extrapolating from models of the typical post-World War II business cycle. The current cycle bears no resemblance at all to its predecessors over the past 50 years. The modern-day world economy has never been this US-centric. And the United States -- the unquestioned engine of the world -- has never had to deal with the wrenching aftershocks of a post-bubble business cycle like the one still unfolding today. The combination of these two forces has not only pushed the world closer to deflation than at any point in half a century, but it has created unprecedented disparities between nations with current account deficits (the United States) and surpluses (Asia and Europe). Our baseline case presumes that the world can neatly finesse these extraordinary imbalances. I continue to have serious doubts that it will all unfold that neatly.
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