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To: Jim Willie CB who wrote (1675)	10/8/2003 8:07:04 PM
From: Jim Willie CB	Read Replies (1) \| Respond to of 108704

Global: A Warning From the Global Consensus Sept 19, 2003 Stephen Roach (New York) The mood in Dubai is cautiously upbeat as the semi-annual IMF-World Bank meetings now get under way. The direct impacts of the war in Iraq and SARS have faded. In response, the global economy seems to be slowly shifting gears to the upside. The official forecast of the IMF staff underscores the tentative nature of this shift. The mounting imbalances of a US-centric world are at the top of their worry list. Needless to say, that’s a theme I certainly have some sympathy with. World financial markets couldn’t care less. There aren’t too many organizations that actually provide a full-blown forecast of the global economy. The IMF outlook sets an important marker for those of us who do. The IMF’s current projection of overall world output growth is unchanged from the April outlook -- a 3.2% increase estimated in 2003 followed by a 4.1% gain projected for 2004. This prognosis is a little bit more optimistic than our own -- a 2.9% increase for 2003 followed by a 3.9% projected gain in 2004. Compared with our view, the major discrepancy can be traceable to the IMF’s relatively more optimistic assessment for growth in Asia ex Japan; we are projecting about a 5.5% average growth rate for the region over the 2003-04 interval, about 0.5 percentage point less than the IMF’s latest forecast. By IMF metrics, Asia ex Japan is actually the largest region in the world -- having a 26% weight in the global economy (as measured on a purchasing-power parity basis). Needless to say, for that reason, alone, Asia’s role as a swing factor in the global economy can hardly be minimized. As the direct impacts of Iraq and SARS have now faded, over the past five months, we have raised our 2003 forecast of world GDP growth by 0.5 percentage points -- from 2.4% to 2.9%. To the extent that the IMF forecast delineates the consensus view of the world, there may be reason to believe that the risks to our prognosis remain on the upside. But as I continue to see it, those risks pertain mainly to the very near term -- mainly reflecting this summer’s growth bubble in the US and Japan and the possibility that it may spill over into other regions and other assets around the world. I remain convinced, however, that this newfound vigor on the growth front is unsustainable. To the extent that surging economic growth may have borrowed from gains in early 2004, America is still facing some sort of payback in the not so distant future. The August vehicle sales boom in the US -- an astonishing 19.4 million annual rate -- is a classic example of how the “borrowing effect” plays out. Yes, showroom floors were crowded. But this surge of demand came more in response to aggressive dealer incentives than from any meaningful improvement in the underlying fundamentals of America’s jobless recovery. To the extent that sales understandably fall off once the incentive campaigns are ended, the case for sustainable cyclical vigor can be brought into serious question. And, of course, I continue to be concerned about the rapidly deteriorating imbalances of a lopsided world -- personified in the form of America’s record current-account deficit. There’s no greater testament, in my view, as to the macro tensions that might short-circuit the cumulative forces of cyclical revival in a lopsided, US-centric global economy. The latest view of the IMF appears to be very much on the same page insofar as the sustainability issue is concerned. Significantly, shifts in the mix of the IMF’s worldwide forecast over the past five months go a long way in underscoring how precarious this global recovery really is. Relative to last April’s projections, the IMF has raised its 2003-04 growth estimates for the United States and Japan but lowered them in most other regions of the world. In other words, the IMF’s baseline view of the world is even more US-centric than before. It’s on that count where the IMF raises the alarm in the text of its updated World Economic Outlook. America’s twin deficits -- fiscal and current account -- are cited as especially disconcerting in this regard. The ability of a saving-short US economy to fund an ever-rising external imbalance is judged as problematic, at best. As a consequence, the likelihood of a dollar correction is thought to be quite high. The debate is more over the speed of such an adjustment and the ever-present possibility of an overshoot. The greater the twin deficits, goes the logic, the higher the odds of a hard landing -- an outcome that could then wreak havoc on ever-complacent world financial markets. The IMF also sounds a note of caution on the failure of the US to purge the bubble-related excesses that built up in the late 1990s. Particularly worrisome in this regard are stretched and strained household balance sheets. A cyclically well-advanced housing sector is also cited as having less potential to support US GDP growth in the future as it has in the recent past. As I put this all altogether, the real thrust of the IMF’s message on the world economy is pretty obvious: While near-term vigor is not to be denied, there are some increasingly worrisome signs on the not-so-distant horizon with respect to the sustainability of yet another burst of US-centric global growth. I couldn’t agree more. Which takes us to the critical question of the moment: What do financial markets see that the IMF and its like-minded sympathizers -- yours truly, included -- are missing? The main insight, in my view, is the presumption that global imbalances really don’t matter at all. They are judged as the inevitable, benign, and even desirable outgrowth of yet another burst from the world’s only real growth engine. For what it’s worth, I continue to take issue with that key point (see my 2 September 2003 essay in Investment Perspectives, “Do Imbalances Matter?”). Imbalances, in my view, are tantamount to instability and fundamental disequilibrium. I would be the first to concede that such a state of disequilibrium is not life threatening in and of itself. But it does leave the economy, or economies, under question far more vulnerable to shocks than might otherwise be the case. To the extent such shocks are the rule, not the exception, I continue to be enamored with the case for an economic relapse in early 2004. Reading between the lines of the IMF’s latest assessment of global risks, I suspect such an outcome wouldn’t come as much of a surprise to them either.