Thursday October 15, 12:34 am Eastern Time
FEATURE-World recession possible, '30s rerun not?
By Linda Sieg
TOKYO, Oct 15 (Reuters) - World financial market turmoil, the collapse of growth in Asia and fears of a global credit crunch are
forcing economists to rachet down forecasts for global growth and admit that recession cannot be ruled out.
But despite a case of crisis jitters, many economic experts say that unless world policymakers suffer collective amnesia, a rerun of
the 1930s Great Depression is unlikely.
''The fact that we are well-versed in what happened then and that everyone, including policymakers, is terrified of it makes it possible to head off,'' said Chris
Calderwood, chief economist at Jardine Flemings in Tokyo.
GLOBAL CRISIS WARNINGS MOUNT
Comparisons to the debacle of 70 years ago are nonetheless falling more frequently from commentators' lips these days.
''There are disturbing parallels between what's happening now and what happened at the start of the 1930s that may signify we're dealing with powerful forces that
we don't understand and can't control,'' wrote Washington Post columnist Robert Samuelson recently.
Mutterings of a potential global depression are also being heard more often in the financial community.
''I think the 'D-word' is in circulation. Polite conversation is lurching in that direction,'' Calderwood said.
Highest on the list of factors pessimists fear could trigger a 1930s rerun is a persistent global share price slide which batters confidence and corporate profits and
causes banks to sharply curtail credit.
Brokerage Goldman Sachs reckons some $2.3 trillion of global financial wealth has already been wiped out by market turbulence in recent months -- the equivalent
of 19 percent of consumer expenditure in OECD (Organisation for Economic Cooperation and Development) countries.
''There has been a cataclysmic global move to cash. Individual investors and institutions are dumping equities out of concern for medium-term growth rates,'' said
Schroders Japan economist Andrew Shipley. ''I can think of a number of things that could trigger a crisis. By no means should people be complacent.''
HOW DEPRESSED IS A GREAT DEPRESSION?
Even some who see possible parallels to the 1930s, however, caution against glib comparisons to the worst economic disaster of the industrial era.
The five years from 1929 to 1933 saw a leap in world unemployment rates and slumping prices and incomes, which fed into a deflationary spiral, a loss of a quarter
of global output, a rise in protectionism that sent international trade spiraling downwards, and a huge contraction in money supply.
The United States suffered a 30 percent fall in real gross national product, a 25 percent decline in prices from their cyclical peak, and a contraction of money supply
by one-third due to successive waves of bank failures.
WORLD RECESSION POSSIBLE IF NOT YET PROBABLE
At present, economists say the chances of a global dip into recession are mounting, though a decline is not yet a sure bet.
Much of Asia is already mired in depression, with some of the hardest-hit regional economies such as Indonesia, Thailand and South Korea forecast by some
economists to see a double-digit decline in domestic demand this year. Unemployment is at 20-year highs in almost every country in the region.
Japan, by far the region's biggest economy, is caught in a recessionary bind. Private economists polled by Reuters have cut their forecasts and now expect Japan's
gross domestic product to shrink on average 1.6 percent in 1998/99, followed by a meagre 0.1 percent rise in 1999/2000.
Few economists are predicting a U.S. recession, but many have reduced their forecasts. Most now expect growth to fall to two percent in 1999 from three percent
this year, a Reuters survey earlier this month showed.
Forecasts for European growth are also being lowered.
J.P. Morgan last week slashed its outlook for 1999 for the 11 countries joining the single European currency to 1.7 percent from 2.5 percent. While the European
Union has thus far stuck to its 2.8 percent outlook, there are whispers of a reduction in the near future.
''We are in a precarious time and there is a risk of things getting worse,'' said Marshall Mays, chief strategist at Nikko Securities in Hong Kong. ''We could be
looking at a significant recession.''
PAST LESSONS LEARNED AND SYSTEM MORE STABLE
Many economists, however, believe that lessons from policy mistakes that tilted the world into depression in the 1930s have been learned well enough to avoid a
rerun now.
Then, tight monetary policies aimed at defending currencies tied to a gold standard, an obsession with balanced budgets and wave of protectionism triggered by the
1930 Smoot Hawley Tariff in the United States sent the world tumbling into depression.
Few see policymakers duplicating that same disastrous mix, although many worry that policy responses may be too slow.
''Unless sensible people take leave of their senses, there'll be no Great Depression in the United States,'' said former U.S. Federal Reserve Vice Chairman Alan
Blinder.
Better data and improved understanding of how economies work and are intertwined with finance and trade, a bigger role for government spending, more
comprehensive social safety nets, deposit insurance, and the existence of multilateral organisations -- however imperfect -- mitigate against an unarrested slide into
depression, wrote Russell Jones, chief economist at Lehman Brothers in Tokyo.
''Unless policymakers suffer a remarkable collective loss of memory, the contemporary situation, while potentially painful, is containable,'' Jones said.
PREDICTIONS OR WISHFUL THINKING?
Sceptics who recall the failure of pundits to predict that Asian economies would fall as deeply as they have since the region's crisis began in July 1997 might wonder
how much credence to put in assurances that global depression is not in store.
Pundits reply that anything is possible, but policymakers in major economies are clearly on their guard against the worst -- and have far better mechanisms for coping
than Asia had.
''You've got the possibility of something very nasty, but nobody is taking it lightly,'' said one foreign economist in Tokyo. ''When you're dealing with the Big Guys --
Europe and the United States -- these are not emerging economies and they have functioning central banks, functioning credit markets and functioning fiscal policies
-- that is the difference.'' |
