A big economic rebound in '03? It may be a long shot
Eric Pfanner/IHT IHT Wednesday, December 18, 2002
LONDON Looking for a robust global economic recovery? You may need to look past 2003 - and think 2004.
.
After a year in which U.S. corporate scandals, talk of a war in Iraq and a global plunge in stock prices torpedoed hopes for a strong rebound from recession, pundits are pessimistic about the coming year.
.
The global economy will speed up only slightly from the current becalmed levels. Growth rates may not return to the average levels of the last half-century until at least 2004.
.
"Economists are always predicting a recovery. We are condemned to expect a recovery," said Eric Chaney, an economist at Morgan Stanley in London. "But the coming year could still be difficult."
.
A recovery of any sort, of course, would be better than the alternative: a renewed slump into recession that would heighten fears of deflation. That condition - a sustained drop in prices that depresses business and consumer activity alike - is something Japan has lived with for more than a decade. Economists speak about the possibility of it spreading in guarded tones, for fear of turning it into a self-fulfilling prophecy.
.
Though global deflation still seems to be an unlikely, worst-case scenario, economic growth remains persistently sluggish in all of the world's biggest economies.
.
Japan shows few signs of coming back anytime soon, the European single currency zone is held back by near-recessionary activity in Germany, and the U.S. economy appears stuck in a pattern of two steps forward, two steps back.
.
The Organization for Economic Cooperation and Development says the global economy will grow 2.2 percent next year, after expanding only 1.5 percent this year. The organization says things will get better in 2004, with growth of 3 percent.
.
Adding to the fundamental near-term weaknesses of the three biggest economies is the intangible drag caused by fear of another large-scale terrorist attack or the disruptive effects of a possible war in Iraq.
.
Perhaps this is the economic equivalent of "capitulation," the stock-market phenomenon when the last bull turns bearish. That might sound like a bad thing, but it usually sets the stage for recovery. Until the most optimistic investors have thrown in the towel, it is impossible for the necessary change in mind-set to filter through the market for a new bull phase to begin.
.
There are still some economic bulls out there, of course, but most forecasts, both public and private, have been marked down sharply from the days following the dot-com collapse, when many economists predicted a strong, rapid recovery. As growth slows, as it has particularly sharply in the euro zone, it is hard to maintain sanguine outlooks.
.
"Europe performed miserably this year, even though America largely lived up to expectations," said Holger Schmieding, an economist at Bank of America in London. "Why should next year be any different?"
.
There are a few signs of optimism amid the gloom. While they are thinly scattered and do little to alter the prevailing view that any economic gains next year will be muted, they suggest that pessimism can be as infectious and irrational as the greed and optimism that Alan Greenspan, chairman of the Federal Reserve, cited as the sources of the economic bubble.
.
Take the technology industry. After two-and-a-half disastrous years following the peak in the Nasdaq stock index in March 2000, few people would pick it as a likely source of growth in 2003.
.
But next year could hold some surprises, economists say. Many computers in corporate offices around the world have been sitting there since at least a year or two before the Nasdaq crested. They are remnants of a burst of spending as companies prepared for Y2K - the dreaded moment when computers would either make a smooth transition to recognizing the year 2000 on their internal clocks, or not.
.
Never mind that Y2K turned out to be the dog that didn't bark. The replacement cycle for many of those machines may be about to kick in. Economists at Credit Suisse First Boston estimate that replacement of all five-year-old PCs next year would lead to purchases of 97 million computers worldwide. Taking into account other new machines, total industry sales estimates of 130 million PCs for next year may be too conservative, these analysts conclude.
.
"Globally, this was a year in which we saw great weakness in investment," said Julian Callow, an economist at CSFB. "It could surprise us a bit on the upside next year."
.
In that case, Asian economies reliant on exports of technology goods and other equipment, are sure to benefit.
.
Increases in corporate spending might not be limited to technology. Capital spending - what companies lay out on computers and other big-ticket items - has been in a deep slump. For example, in Europe it has fallen for seven successive quarters. At some point, economists say, the cycle has to turn.
.
Meanwhile, inventories have fallen sharply, too, particularly in countries such as the United States and Italy. That could lead to a rebound in orders, especially if consumers continue to spend.
.
There are many reasons why companies have been loath to invest, from falling share prices to sluggish profit growth. American executives, already feeling pressure to keep costs under control, face additional scrutiny over their spending decisions in the wake of corporate governance scandals at Enron Corp., WorldCom Inc. and other companies.
.
Fortunately, consumers have taken up the slack, showing a surprising determination to keep their wallets open even as unemployment rises in most of the biggest economies in the world. But the desire to shop till you drop seems to be a largely Anglo-Saxon phenomenon: British and American consumers, helped by ever-lower interest rates, are still spending freely on new cars and clothes, even amid signs that the forces that drive this phenomenon may be waning.
.
Home prices in Britain and the United States have surged over the last half-decade, particularly over the last year, as buyers take advantage of near-record-low interest rates to take on larger mortgages than they ever dreamed possible in the high-inflation, high-interest-rate years of the 1970s.
.
But after the Fed lowered interest rates to 1.25 percent in November, rates cannot go much lower in the United States. In Britain, central bankers have signaled that, concerned about 25 percent to 30 percent annual rates of housing price inflation, rates will probably stay on hold as well.
.
That means the wave of mortgage refinancing that provided consumers with a little extra purchasing power this year may be over. And if home prices actually go into reverse, the surprisingly robust British economy could be headed for trouble, economists say.
.
Even if American shoppers can keep up the pace, it might not be a good thing, some economists say. Sure, they have kept apparel factories running in Thailand and auto assembly lines humming outside Toronto, but at great cost.
.
The U.S. current-account deficit, the broadest measure of trade in goods and services, keeps rising to record levels. To finance that gap, the United States requires inflows of as much as $2 billion a day in foreign capital.
.
"Another burst of U.S.-led global growth can only exacerbate an already massive current-account deficit," said Stephen Roach, chief global economist at Morgan Stanley.
.
That cannot continue forever, he added. If the current account does not move closer to balance through greater foreign purchases of U.S. goods and a reduced American appetite for imports, it could correct itself through sharp drop in the value of the dollar.
.
Unfortunately, the growth outlook for most of the other big industrial countries next year is even worse than for the United States, so they are unlikely to start purchasing huge amounts of U.S. exports. Analysts say Japanese policymakers show no signs of embracing the fundamental reforms that are needed to get that economy going again.
.
European policymakers also have little room to maneuver. Fiscal policy is constrained by the strict guidelines governing monetary union, and with no elections looming next year - unlike 2002 - politicians will be less tempted to break those rules and risk the ire of the European Central Bank. That means the global economy may once again be dependent on the United States - for better or worse.
.
"The modern-day world economy has never been this U.S.-centric," Roach wrote to clients. "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."
< < Back to Start of Article LONDON Looking for a robust global economic recovery? You may need to look past 2003 - and think 2004.
.
After a year in which U.S. corporate scandals, talk of a war in Iraq and a global plunge in stock prices torpedoed hopes for a strong rebound from recession, pundits are pessimistic about the coming year.
.
The global economy will speed up only slightly from the current becalmed levels. Growth rates may not return to the average levels of the last half-century until at least 2004.
.
"Economists are always predicting a recovery. We are condemned to expect a recovery," said Eric Chaney, an economist at Morgan Stanley in London. "But the coming year could still be difficult."
.
A recovery of any sort, of course, would be better than the alternative: a renewed slump into recession that would heighten fears of deflation. That condition - a sustained drop in prices that depresses business and consumer activity alike - is something Japan has lived with for more than a decade. Economists speak about the possibility of it spreading in guarded tones, for fear of turning it into a self-fulfilling prophecy.
.
Though global deflation still seems to be an unlikely, worst-case scenario, economic growth remains persistently sluggish in all of the world's biggest economies.
.
Japan shows few signs of coming back anytime soon, the European single currency zone is held back by near-recessionary activity in Germany, and the U.S. economy appears stuck in a pattern of two steps forward, two steps back.
.
The Organization for Economic Cooperation and Development says the global economy will grow 2.2 percent next year, after expanding only 1.5 percent this year. The organization says things will get better in 2004, with growth of 3 percent.
.
Adding to the fundamental near-term weaknesses of the three biggest economies is the intangible drag caused by fear of another large-scale terrorist attack or the disruptive effects of a possible war in Iraq.
.
Perhaps this is the economic equivalent of "capitulation," the stock-market phenomenon when the last bull turns bearish. That might sound like a bad thing, but it usually sets the stage for recovery. Until the most optimistic investors have thrown in the towel, it is impossible for the necessary change in mind-set to filter through the market for a new bull phase to begin.
.
There are still some economic bulls out there, of course, but most forecasts, both public and private, have been marked down sharply from the days following the dot-com collapse, when many economists predicted a strong, rapid recovery. As growth slows, as it has particularly sharply in the euro zone, it is hard to maintain sanguine outlooks.
.
"Europe performed miserably this year, even though America largely lived up to expectations," said Holger Schmieding, an economist at Bank of America in London. "Why should next year be any different?"
.
There are a few signs of optimism amid the gloom. While they are thinly scattered and do little to alter the prevailing view that any economic gains next year will be muted, they suggest that pessimism can be as infectious and irrational as the greed and optimism that Alan Greenspan, chairman of the Federal Reserve, cited as the sources of the economic bubble.
.
Take the technology industry. After two-and-a-half disastrous years following the peak in the Nasdaq stock index in March 2000, few people would pick it as a likely source of growth in 2003.
.
But next year could hold some surprises, economists say. Many computers in corporate offices around the world have been sitting there since at least a year or two before the Nasdaq crested. They are remnants of a burst of spending as companies prepared for Y2K - the dreaded moment when computers would either make a smooth transition to recognizing the year 2000 on their internal clocks, or not.
.
Never mind that Y2K turned out to be the dog that didn't bark. The replacement cycle for many of those machines may be about to kick in. Economists at Credit Suisse First Boston estimate that replacement of all five-year-old PCs next year would lead to purchases of 97 million computers worldwide. Taking into account other new machines, total industry sales estimates of 130 million PCs for next year may be too conservative, these analysts conclude.
.
"Globally, this was a year in which we saw great weakness in investment," said Julian Callow, an economist at CSFB. "It could surprise us a bit on the upside next year."
.
In that case, Asian economies reliant on exports of technology goods and other equipment, are sure to benefit.
.
Increases in corporate spending might not be limited to technology. Capital spending - what companies lay out on computers and other big-ticket items - has been in a deep slump. For example, in Europe it has fallen for seven successive quarters. At some point, economists say, the cycle has to turn.
.
Meanwhile, inventories have fallen sharply, too, particularly in countries such as the United States and Italy. That could lead to a rebound in orders, especially if consumers continue to spend.
.
There are many reasons why companies have been loath to invest, from falling share prices to sluggish profit growth. American executives, already feeling pressure to keep costs under control, face additional scrutiny over their spending decisions in the wake of corporate governance scandals at Enron Corp., WorldCom Inc. and other companies.
.
Fortunately, consumers have taken up the slack, showing a surprising determination to keep their wallets open even as unemployment rises in most of the biggest economies in the world. But the desire to shop till you drop seems to be a largely Anglo-Saxon phenomenon: British and American consumers, helped by ever-lower interest rates, are still spending freely on new cars and clothes, even amid signs that the forces that drive this phenomenon may be waning.
.
Home prices in Britain and the United States have surged over the last half-decade, particularly over the last year, as buyers take advantage of near-record-low interest rates to take on larger mortgages than they ever dreamed possible in the high-inflation, high-interest-rate years of the 1970s.
.
But after the Fed lowered interest rates to 1.25 percent in November, rates cannot go much lower in the United States. In Britain, central bankers have signaled that, concerned about 25 percent to 30 percent annual rates of housing price inflation, rates will probably stay on hold as well.
.
That means the wave of mortgage refinancing that provided consumers with a little extra purchasing power this year may be over. And if home prices actually go into reverse, the surprisingly robust British economy could be headed for trouble, economists say.
.
Even if American shoppers can keep up the pace, it might not be a good thing, some economists say. Sure, they have kept apparel factories running in Thailand and auto assembly lines humming outside Toronto, but at great cost.
.
The U.S. current-account deficit, the broadest measure of trade in goods and services, keeps rising to record levels. To finance that gap, the United States requires inflows of as much as $2 billion a day in foreign capital.
.
"Another burst of U.S.-led global growth can only exacerbate an already massive current-account deficit," said Stephen Roach, chief global economist at Morgan Stanley.
.
That cannot continue forever, he added. If the current account does not move closer to balance through greater foreign purchases of U.S. goods and a reduced American appetite for imports, it could correct itself through sharp drop in the value of the dollar.
.
Unfortunately, the growth outlook for most of the other big industrial countries next year is even worse than for the United States, so they are unlikely to start purchasing huge amounts of U.S. exports. Analysts say Japanese policymakers show no signs of embracing the fundamental reforms that are needed to get that economy going again.
.
European policymakers also have little room to maneuver. Fiscal policy is constrained by the strict guidelines governing monetary union, and with no elections looming next year - unlike 2002 - politicians will be less tempted to break those rules and risk the ire of the European Central Bank. That means the global economy may once again be dependent on the United States - for better or worse.
.
"The modern-day world economy has never been this U.S.-centric," Roach wrote to clients. "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." LONDON Looking for a robust global economic recovery? You may need to look past 2003 - and think 2004.
.
After a year in which U.S. corporate scandals, talk of a war in Iraq and a global plunge in stock prices torpedoed hopes for a strong rebound from recession, pundits are pessimistic about the coming year.
.
The global economy will speed up only slightly from the current becalmed levels. Growth rates may not return to the average levels of the last half-century until at least 2004.
.
"Economists are always predicting a recovery. We are condemned to expect a recovery," said Eric Chaney, an economist at Morgan Stanley in London. "But the coming year could still be difficult."
.
A recovery of any sort, of course, would be better than the alternative: a renewed slump into recession that would heighten fears of deflation. That condition - a sustained drop in prices that depresses business and consumer activity alike - is something Japan has lived with for more than a decade. Economists speak about the possibility of it spreading in guarded tones, for fear of turning it into a self-fulfilling prophecy.
.
Though global deflation still seems to be an unlikely, worst-case scenario, economic growth remains persistently sluggish in all of the world's biggest economies.
.
Japan shows few signs of coming back anytime soon, the European single currency zone is held back by near-recessionary activity in Germany, and the U.S. economy appears stuck in a pattern of two steps forward, two steps back.
.
The Organization for Economic Cooperation and Development says the global economy will grow 2.2 percent next year, after expanding only 1.5 percent this year. The organization says things will get better in 2004, with growth of 3 percent.
.
Adding to the fundamental near-term weaknesses of the three biggest economies is the intangible drag caused by fear of another large-scale terrorist attack or the disruptive effects of a possible war in Iraq.
.
Perhaps this is the economic equivalent of "capitulation," the stock-market phenomenon when the last bull turns bearish. That might sound like a bad thing, but it usually sets the stage for recovery. Until the most optimistic investors have thrown in the towel, it is impossible for the necessary change in mind-set to filter through the market for a new bull phase to begin.
.
There are still some economic bulls out there, of course, but most forecasts, both public and private, have been marked down sharply from the days following the dot-com collapse, when many economists predicted a strong, rapid recovery. As growth slows, as it has particularly sharply in the euro zone, it is hard to maintain sanguine outlooks.
.
"Europe performed miserably this year, even though America largely lived up to expectations," said Holger Schmieding, an economist at Bank of America in London. "Why should next year be any different?"
.
There are a few signs of optimism amid the gloom. While they are thinly scattered and do little to alter the prevailing view that any economic gains next year will be muted, they suggest that pessimism can be as infectious and irrational as the greed and optimism that Alan Greenspan, chairman of the Federal Reserve, cited as the sources of the economic bubble.
.
Take the technology industry. After two-and-a-half disastrous years following the peak in the Nasdaq stock index in March 2000, few people would pick it as a likely source of growth in 2003.
.
But next year could hold some surprises, economists say. Many computers in corporate offices around the world have been sitting there since at least a year or two before the Nasdaq crested. They are remnants of a burst of spending as companies prepared for Y2K - the dreaded moment when computers would either make a smooth transition to recognizing the year 2000 on their internal clocks, or not.
.
Never mind that Y2K turned out to be the dog that didn't bark. The replacement cycle for many of those machines may be about to kick in. Economists at Credit Suisse First Boston estimate that replacement of all five-year-old PCs next year would lead to purchases of 97 million computers worldwide. Taking into account other new machines, total industry sales estimates of 130 million PCs for next year may be too conservative, these analysts conclude.
.
"Globally, this was a year in which we saw great weakness in investment," said Julian Callow, an economist at CSFB. "It could surprise us a bit on the upside next year."
.
In that case, Asian economies reliant on exports of technology goods and other equipment, are sure to benefit.
.
Increases in corporate spending might not be limited to technology. Capital spending - what companies lay out on computers and other big-ticket items - has been in a deep slump. For example, in Europe it has fallen for seven successive quarters. At some point, economists say, the cycle has to turn.
.
Meanwhile, inventories have fallen sharply, too, particularly in countries such as the United States and Italy. That could lead to a rebound in orders, especially if consumers continue to spend.
.
There are many reasons why companies have been loath to invest, from falling share prices to sluggish profit growth. American executives, already feeling pressure to keep costs under control, face additional scrutiny over their spending decisions in the wake of corporate governance scandals at Enron Corp., WorldCom Inc. and other companies.
.
Fortunately, consumers have taken up the slack, showing a surprising determination to keep their wallets open even as unemployment rises in most of the biggest economies in the world. But the desire to shop till you drop seems to be a largely Anglo-Saxon phenomenon: British and American consumers, helped by ever-lower interest rates, are still spending freely on new cars and clothes, even amid signs that the forces that drive this phenomenon may be waning.
.
Home prices in Britain and the United States have surged over the last half-decade, particularly over the last year, as buyers take advantage of near-record-low interest rates to take on larger mortgages than they ever dreamed possible in the high-inflation, high-interest-rate years of the 1970s.
.
But after the Fed lowered interest rates to 1.25 percent in November, rates cannot go much lower in the United States. In Britain, central bankers have signaled that, concerned about 25 percent to 30 percent annual rates of housing price inflation, rates will probably stay on hold as well.
.
That means the wave of mortgage refinancing that provided consumers with a little extra purchasing power this year may be over. And if home prices actually go into reverse, the surprisingly robust British economy could be headed for trouble, economists say.
.
Even if American shoppers can keep up the pace, it might not be a good thing, some economists say. Sure, they have kept apparel factories running in Thailand and auto assembly lines humming outside Toronto, but at great cost.
.
The U.S. current-account deficit, the broadest measure of trade in goods and services, keeps rising to record levels. To finance that gap, the United States requires inflows of as much as $2 billion a day in foreign capital.
.
"Another burst of U.S.-led global growth can only exacerbate an already massive current-account deficit," said Stephen Roach, chief global economist at Morgan Stanley.
.
That cannot continue forever, he added. If the current account does not move closer to balance through greater foreign purchases of U.S. goods and a reduced American appetite for imports, it could correct itself through sharp drop in the value of the dollar.
.
Unfortunately, the growth outlook for most of the other big industrial countries next year is even worse than for the United States, so they are unlikely to start purchasing huge amounts of U.S. exports. Analysts say Japanese policymakers show no signs of embracing the fundamental reforms that are needed to get that economy going again.
.
European policymakers also have little room to maneuver. Fiscal policy is constrained by the strict guidelines governing monetary union, and with no elections looming next year - unlike 2002 - politicians will be less tempted to break those rules and risk the ire of the European Central Bank. That means the global economy may once again be dependent on the United States - for better or worse.
.
"The modern-day world economy has never been this U.S.-centric," Roach wrote to clients. "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." LONDON Looking for a robust global economic recovery? You may need to look past 2003 - and think 2004.
.
After a year in which U.S. corporate scandals, talk of a war in Iraq and a global plunge in stock prices torpedoed hopes for a strong rebound from recession, pundits are pessimistic about the coming year.
.
The global economy will speed up only slightly from the current becalmed levels. Growth rates may not return to the average levels of the last half-century until at least 2004.
.
"Economists are always predicting a recovery. We are condemned to expect a recovery," said Eric Chaney, an economist at Morgan Stanley in London. "But the coming year could still be difficult."
.
A recovery of any sort, of course, would be better than the alternative: a renewed slump into recession that would heighten fears of deflation. That condition - a sustained drop in prices that depresses business and consumer activity alike - is something Japan has lived with for more than a decade. Economists speak about the possibility of it spreading in guarded tones, for fear of turning it into a self-fulfilling prophecy.
.
Though global deflation still seems to be an unlikely, worst-case scenario, economic growth remains persistently sluggish in all of the world's biggest economies.
.
Japan shows few signs of coming back anytime soon, the European single currency zone is held back by near-recessionary activity in Germany, and the U.S. economy appears stuck in a pattern of two steps forward, two steps back.
.
The Organization for Economic Cooperation and Development says the global economy will grow 2.2 percent next year, after expanding only 1.5 percent this year. The organization says things will get better in 2004, with growth of 3 percent.
.
Adding to the fundamental near-term weaknesses of the three biggest economies is the intangible drag caused by fear of another large-scale terrorist attack or the disruptive effects of a possible war in Iraq.
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