Global economy in turmoil and experts disagree on fix
APRIL LINDGREN
Southam News
<Picture>KATSUMI KASAHARA, AP / Two women pass the headquarters of Tokyo's Long-Term Credit Bank of Japan, which had its credit rating downgraded by Moody's Investors Service on Wednesday. The bank, plagued with debt, was reported in June to be on the verge of collapse after a downgrade and its shares became almost worthless overnight.
<Picture>YURI KADOBNOV, AFP / Traders sat at their computers at the Moscow stock exchange yesterday after the main index fell enough to trigger a trading halt. Page F2
Amid growing concerns that the global economy is rapidly unraveling, economists are at odds over what governments can do about it.
"We haven't witnessed anything like this since the '30s in terms of so many regions of the world being in such serious trouble," said Martin Barnes, managing editor of the Montreal-based Bank Credit Analyst, an influential advisory service for professional investors.
"This is not just a typical business cycle that will run its course fairly quickly," he said on a day when fears of economic chaos - this time in Russia - sent world financial markets into renewed turmoil.
Barnes questions whether governments have the economic tools to respond to the upheaval. But other economists believe many industrialized countries, at least, are well-equipped to meet the challenge.
In New York, the Dow Jones industrial average closed down 93.47 points at 8459.5. The Toronto Stock Exchange 300 composite index continued its roller-coaster week, closing down 150.13 points, or 2.3 per cent, at 6345.22. Yesterday's losses reversed most of the modest gains made a day earlier.
"Investors are very, very nervous right now and the minute you get any negative news coming out of anywhere, it has an impact," said Marc Levesque, an economist with TD Economics.
Yesterday's negative news came out of Russia, where fears of a currency devaluation or debt default turned into panic. For the second time in a week, trading in Russian shares was temporarily halted. The Russian trading index closed at a 27-month low. The ruble, which has fallen 8 per cent in the last year, continued to decline.
Rob Palombi, a money-watcher at Standard and Poor's MMS, said the Russian chaos hurt the Canadian dollar. Traders dumped commodity-linked currencies such as the loony, he said, because they are worried Russia's economic chaos will hurt major creditors such as Germany's banks. "That would undermine Europe and the global economy even more and push commodity prices down farther."
The dollar closed unchanged from the day before at 65.82 cents U.S. but only after the Bank of Canada intervened to rescue it from a low of 65.79. Palombi said the central bank's intervention - for the sixth day in a row - was not significant.
Russia's finances are near collapse because of major leaks in the taxcollection system, a massive national debt, slumping commodity prices and a shaky banking system.
Looking at the global economy in general, Barnes argues that past worldwide recessions were easier to understand and easier to resolve. High oil prices in the 1970s put the world into recession; the global economy recovered when those prices dropped.
"What we have now is much more structural and much more serious and the solutions are painful, long-run solutions."
What's more, he said, "there are some very unusual things going on" that make it difficult for governments to respond to problems that began last summer in Asia and are now intensifying.
Governments can usually lower interest rates to stimulate the economy, Barnes said. "But look at Japan. They've had interest rates of close to zero for a couple of years now and they've been stuck in eight years of stagnation that is now turning into a recession."
Similarly, he argues that the U.S. economy is also unusual in that inflation is still minimal despite eight years of spectacular growth.
"If we have one-per-cent inflation in the U.S. with the economy growing this strongly what's going to happen when the economy slows? This is what makes deflation a risk," he says glumly.
"To talk about a global recession is extreme, but I think you will see a lot more people worried about that in six months," especially if the U.S. economy loses steam and ceases to be the global locomotive.
Joshua Mendelsohn, chief economist with the Canadian Imperial Bank of Commerce, is less pessimistic. He argues that low inflation in industrialized countries such as the United States and Canada means governments can reduce interest rates to offset the worst of the global economic problems.
He also points out that many national governments are in a much stronger fiscal position than they were five or six years ago. That gives them more leeway to increase public spending to boost domestic economies.
Mendelsohn said, however, that many of the economies hardest hit by the Asian crisis have long-term problems to deal with.
The Japanese, for example, are under pressure to reduce taxes to stimulate domestic consumption. But Mendelsohn said it will take time for apprehensive consumers to respond and the government must also address major structural problems in the banking sector.
China is also struggling to respond to the immediate crisis and to do the right thing for its economy in the longer term, he said.
Plans to introduce market reforms have been put off because they would have caused massive job losses. If the economy had continued to grow at 7 or 8 per cent, new jobs would have eased the pain. But a slump in Chinese exports due to economic collapse in the region means growth will be more like 6 per cent this year, he predicted.
Although Chinese leaders have pledged not to devalue their currency, they have been sending out mixed messages in recent days. Devaluation would be disastrous because it would spark another round of competitive devaluations in Asia. That, in turn, would signal more chaos in the region, further weaken commodity prices and have a ripple effect on commodity exporters such as Canada.
"If you want to scare yourself, you can do it," Mendelsohn said. "It's very easy in today's world."
In addition to devaluation by the Chinese, Mendelsohn and Barnes pointed to other flashpoints that would indicate further deterioration in the global economy.
- Continuing declines in the Canadian and the U.S. stock market. "A good part of consumer spending is being bolstered by people feeling wealthier as a result of the gains they have made in the markets in recent days," says Mendelsohn. "If the deterioration continues, all of these consumers may go back into the bunker" leaving the domestic economies to languish along side the export sector.
- Further declines in commodity prices. If they keep falling, investor nervousness about countries dependent on commodity exports will continue. Lower prices will also affect corporate earnings raising concerns about more trouble in the stock markets.
- Weak export performances in Asia. Currency devaluations should make Asian countries' exports more affordable, but Barnes points out that increased sales are being offset by the low prices resulting from cut-throat competition. "These countries need more dollars to service their foreign debt," he says.
- Failure of Japan to introduce economic reforms. The international investment community is already concerned that Japan, the major economic growth engine in Asia, isn't cutting taxes fast enough to stimulate its economy. There are also concerns about the Japanese government's commitment to serious reforms of the banking sector.
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