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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: sciAticA errAticA who wrote (31321)	4/11/2003 10:03:57 AM
From: sciAticA errAticA	Read Replies (1) \| Respond to of 74559

Global: Shoulder to Shoulder with the IMF Stephen Roach (New York) Morgan Stanley Apr 11, 2003 There aren’t too many of us in the global forecasting business anymore. That’s a real pity -- especially with the world economy in such a shambles these days. But the International Monetary Fund -- long the official arbiter of the world’s GDP -- has just come out with its latest update. It provides an important cross-check on our own prognosis of a world in distress. The IMF has just slashed its estimate of world GDP growth in 2003 to 3.2% -- a cut of 0.5 percentage point from the 3.7% forecast of record made last September. The revisions were largely concentrated in the industrial world. The European prognosis was pared the most -- from 2.3% to 1.1%. But the IMF also lowered its numbers for the United States (from 2.6% to 2.1%) and Japan (from 1.1% to 0.8%). In the developing world, the IMF’s cuts were mainly evident in Latin America, where their 2003 estimates went from 3.0% to 1.5%. By contrast, in developing Asia, growth estimates were left unchanged at a vigorous 6.3%. In official circles, a cut of 0.5 percentage point off an annual estimate for world GDP growth is a big deal. But, in my view, the IMF’s latest cuts aren’t nearly big enough. Our current -- and also downwardly revised -- forecast calls for world GDP growth of 2.4% in 2003. That’s fully 0.8 percentage points below the IMF’s just-released estimate. But it’s not only the numerical difference that matters; these forecasts each depict a very different character of the global economy. The IMF’s 3.2% global growth estimate portrays a decided subpar growth trajectory, with world GDP growth estimated to be 0.4 percentage point below its 3.6% longer-term (post-1970) trend. By contrast, our latest estimate takes the world economy technically into the recession zone -- just piercing the 2.5% growth threshold normally associated with global downturns. To be sure, neither forecast depicts any vigor in the world economy. But our view certainly emphasizes the perils that lurk on the downside. The bulk of the difference between us and the IMF can be traceable to two areas of the world -- Asia ex Japan and Europe. In Asia, the IMF is still carrying a 6.0% growth estimate for 2003, well in excess of our downwardly revised 4.6% prognosis. With this region accounting for fully 26.3% of world GDP as measured on a purchasing-power-parity basis, the Asian forecast difference accounts for fully half the total gap between our view and the IMF’s for 2003. Not surprisingly, the IMF does not appear to have made any modifications of its Asian growth estimates to reflect the impact of SARS -- severe acute respiratory syndrome. By contrast, we recently knocked 0.4 percentage point off our 2003 Asian growth forecast to reflect a sharp SARS-related reduction in tourism in these tourist-intensive economies. With tourism, travel, entertainment, and a variety of other key service activities (i.e., retailing) having come to a virtual standstill in this once-resilient region, I am certain the IMF would have made a similar adjustment had they gone through their forecast update a couple of weeks later. Nevertheless, our pre-SARS view of Asia appears to have been somewhat weaker than the IMF’s -- mainly reflecting more cautious forecasts of the so-called newly industrialized economies (NIE) of Asia (Korea, Singapore, Hong Kong, and Taiwan). This difference appears traceable mainly to our heightened concerns over a more cyclical outcome for the global trade cycle -- a big deal for trade-intensive Asian NIEs. For Europe, there is less of a disparity. Our latest forecast for 0.8% GDP growth in the euro area for 2003 is 0.3 percentage point below the IMF’s 1.1% forecast. The bulk of the difference shows up in Germany -- Europe’s largest economy, accounting for fully 28% of pan-regional GDP; our prognosis for “zero growth” in Germany this year is 0.5 percentage point below the official IMF outlook. While IMF can hardly be accused of having an upbeat view of Germany -- the industrial country it judges to be next in line for deflation after Japan -- it does appear to be somewhat more upbeat on the prospects for private consumption than we are. Subdued inflation is expected to provide a bit more of an assist to household purchasing power. I do not want to make a big deal out of the differences between our global forecast and that of the IMF -- especially since the very recent outbreak of SARS may well account for close to half the disparity. Instead, I would rather stress the similarities -- especially the qualitative concern that IMF expresses over the precarious state of the global economy. I have long stressed two macro-analytic flaws in the current state of the world economy -- a US-centric global growth dynamic and a post-bubble shakeout in the US economy. In warning of the downside risks to its downwardly revised global outlook, the IMF stresses the interplay between those same concerns. In particular, the IMF warns of the severe repercussions of outsize disparities in external imbalances -- America’s gaping current-account deficit, on the one hand, and the surpluses of Asia and Europe, on the other. With the US budget situation deteriorating rapidly, the IMF fears a further widening in the US current-account gap and concomitant downward pressures on a still overvalued US dollar. I couldn’t agree more. Unfortunately, these are the very issues that investors, politicians, and even most policy makers simply want to ignore. Like former US Treasury Secretary Paul O’Neill, most want to believe that it’s actually a good thing if a US-centric world draws increased support from America’s massive and ever-widening current-account deficit. In the world according to O’Neill, that is simply a manifestation of a seemingly insatiable demand for superior returns from dollar-denominated assets. The “O’Neill” effect is premised on the notion that America’s current-account deficit is an unavoidable by-product of its capital-account surplus. Unfortunately, nothing could be further from the truth. In my view -- and one also emphasized by the IMF -- the record US current-account deficit is nothing to gloat over. It reflects two key flaws of a dysfunctional world: the needs of a saving-short US economy to fund investment by importing foreign saving, and the lack of any vigor to domestic demand growth outside of the United States. The final twist in this saga is the very recent and dramatic deterioration in the US budget deficit -- a shift toward further domestic “dissaving” that could well lead to a sharp further widening of America’s already massive external imbalance. Economic history is utterly devoid of examples of large and ever-widening current-account deficits -- for any nation. Therein lies the major pitfall for a dysfunctional global economy. I couldn’t agree more with the IMF on that key point. morganstanley.com