Stephen Roach is in the Financial Times today. The message is unchanged: a global economy which is unbalanced and in post-bubble shock is in dager of taking one hit too many.
War, uncertainty and disease are a tough combination for any economy. But for an unbalanced and vulnerable world, this combination of shocks hurts all the more. A global double dip may now be at hand.
The big economies of the developed world appear to have contracted in February and March. Not only has industrial sector activity in the US, Europe, and Japan been getting weaker but most important barometers of service sector activity in these countries are also flashing signs of weakness. At the same time, labour markets around the world are softening, higher energy prices are sapping consumer purchasing power and capital spending is being put on hold.
Now Asia has been hit hard by the outbreak of a virulent new disease - severe acute respiratory syndrome (Sars). Sars has brought tourism, travel, entertainment and other service activities such as retailing to a virtual standstill in this once-resilient region. Tourism alone represents about 3 to 4 per cent of gross domestic product in Asia, and Chinese tourists have accounted for an increasingly larger portion of the activity in recent years.
With the Chinese now reluctant to travel - not just overseas but also at home - and with Asian countries restricting the entry of visitors from affected areas, the Sars effect could easily escalate. Morgan Stanley has pared its 2003 estimate of growth in Asia (ex Japan) from 5 per cent to 4.5 per cent. This assumes a 60 per cent fall in tourism over the next three months and then a return to normal.
Unfortunately, the Sars effect is concentrated on Asia - the region of the world that we had counted on to keep the global economy afloat. With this source of global resilience now being undermined, the global economy has little left to support it. Had economic growth been more vigorous before the outbreak of Sars, this probably would not have made such a difference. Sadly, that is not the case. There is far more to the story of emerging global weakness than a Sars-related downturn in Asia. War, and the related uncertainties, are equally important factors. But Sars may be the tipping point.
An increasingly vulnerable world economy was ripe for a fall. Growth in the industrial world slowed appreciably in the final months of last year - well before war- and Sars-related jitters took hold. Annualised GDP growth in the fourth quarter of 2002 was only 1.4 per cent in the US, about 1 per cent in the eurozone and 2 per cent in Japan. The world economy was operating at "stall speed" - growing too slowly to withstand a big external shock.
As bad luck would have it, several such shocks have now hit. In the annals of the business cycle, the combination of stall speed and a shock is lethal - it almost always leads to a contraction in economic activity. There is little reason to believe that things will be different this time. Accordingly, Morgan Stanley now forecasts only 2.4 per cent growth in world GDP in 2003 - significantly below the International Monetary Fund's just-released estimate of 3.2 per cent. Anything below 2.5 per cent world GDP growth is usually viewed as a global recession. This suggests that the world has now lapsed back into recession territory for the second time in three years. It is a fractional breach of that threshold, to be sure. But my fear is that there could be more to come on the downside.
Source: Financial Times
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