Nationwide Economist Predicts a Fragile Global Economy
09:59 a.m. Oct 13, 1998 Eastern
COLUMBUS, Ohio, Oct. 13 /PRNewswire/ -- If trends continue through year- end, 1999 is likely to be another nerve-racking year for investors around the world, according to Nationwide Insurance Enterprise Chief Economist Bharat Nauriyal.
In the Nationwide Insurance Enterprise's Fourth-Quarter Global Economic Outlook, released just ahead of last week's World/Bank IMF annual meeting, Nauriyal characterized the global economy as fragile. Nationwide Insurance Enterprise, based in Columbus, Ohio, is a $90 billion Fortune 500 company and one of the country's largest diversified insurance and financial services organizations.
"Already, economies accounting for two-fifths of the world's GDP are either in recession or on the brink of one. No wonder, the world economy is more vulnerable than it has been in the past 50 years as currency turmoil and plummeting commodity prices over the past year have created instability and vaporized or seriously dampened growth prospects in a significant number of countries around the globe," Nauriyal said.
As long as the U.S. and European economies remain fundamentally sound and resilient to the ongoing turmoil, Nauriyal said that a global recession outlook seems premature. He estimated a 35 percent probability of global recession. Nevertheless, he warns that intensifying panic from ongoing turbulence in global financial markets has a potential to make global recession a self-fulfilling prophecy.
After growing by nearly 4 percent over the past two years, global GDP is expected to grow by a mere 2 percent in 1998 -- a drastic decline from the 3.7 percent pace projected just sixth months ago. However, if Asia fails to revive and the U.S. and European Union economies slow more than anticipated, or irrational pessimism prevails, the global economy may barely grow next year.
In addition, Nauriyal questions whether Brazil and China can withstand the pressures and stem the ongoing indiscriminate assaults on emerging markets. If Brazil loses the battle; the turmoil will first engulf other countries in Latin America and then affect the U.S. economy. If China succumbs, the current emerging markets meltdown will undoubtedly turn into a global meltdown, he said.
A coordinated G7 monetary easing is unlikely in fourth quarter 1998, primarily due to policy constraints imposed by the impending monetary union in Europe, Nauriyal maintained.
"I do not expect a recession or deflation within the G7 with the exception of Japan. As a result, this outlook entails an upward adjustment in bond yields, especially if the U.S. economic slowdown is less than currently anticipated," he said.
The Americas
A rather abrupt change in the global economic environment and financial markets has made the U.S. economy more vulnerable to additional external shock and that has dampened growth prospects. Economic growth (real GDP) is projected to decline from a 3 percent pace in 1998 to marginally below 2 percent in 1999.
Nauriyal said that the most important factors contributing to this modest growth outlook are turbulent financial markets, a squeeze on corporate earnings and collapse in U.S. export growth.
Most economic indicators are still pointing to continued modest growth in the U.S., Nauriyal explained. Unemployment remains at a 28-year low, interest rates are at record lows, and disinflation is contributing to a near 4 percent growth in consumer incomes.
However, Nauriyal said that prospects for growth in the rest of the Americas have weakened sharply since the political and economic crisis in Russia thrust Brazil into the front line of global financial panic. Argentina, Mexico, Venezuela and Colombia are the other significant economies in the region also feeling pressure.
Growth projections for most countries in the region have been downgraded significantly compared to four months ago. For 1999, growth in Latin America is projected at 1.5 percent, down sharply from over 4 percent just a few months back. Canada's growth projections have been downgraded to 2 percent from 2.5 percent.
Europe
While recession is highly unlikely, Nauriyal said that 1999 growth is likely to be closer to 2 percent, rather than 3 percent. He expects a slowdown in 1999 and acceleration in growth thereafter.
With Gerhard Schroeder taking over the reins of power in Germany, Nauriyal pointed out that incumbent governments in all 11 European Monetary Union members have been ushered out of power. As in the U.S., the spillover effects of the currency crises in the emerging world will test the resilience of European growth.
Though the common currency, the "Euro," is set for introduction with record low and stable interest rates, it confronts a huge challenge in tackling the region's affliction with high unemployment.
Asia/Pacific
Nauriyal reported that ongoing global turmoil is adding to the economic and social devastation that structural reforms from last year's turmoil have already imposed on countries across the region. He said it has raised the likelihood that the region's recession will be prolonged and might even deepen.
"The lack of fortitude among Japan's policymakers to quickly bring its financial system back to sound health and regain the confidence of investors is clearly manifest in the 12-year low to which Japan's stock market has tumbled," Nauriyal said. "It also continues to remain an important contributory factor to the heightened uncertainty in the global economic environment. Unless this changes and there are some encouraging signs of progress, the region's growth locomotive is likely to stay off track."
In the current environment, the ability of China to manage its growth slowdown and avoid currency devaluation takes on added significance. Despite the economic fundamentals that make a strong case against the need for China to devalue, Nauriyal believes that if flagging domestic demand does not revive by mid 1999 and current deflationary pressures persist, devaluation is quite likely.
China, India and Taiwan, the only three countries in the region that have thus far been relatively immune to the region's social and economic turmoil, are also the only ones with positive growth prospects for 1999, Nauriyal said. SOURCE Nationwide Insurance
Copyright 1998, PR Newswire |
