Global Double Dip?

Yes, its Friday again, and Stephen Roach is here to cheer us up for the weekend. And as can be seen he's got his flag up and is calling: even if, as he admits its, his call is a close one (no pun intended). Maybe I should take heart and make mine: it's time we started to rewrite this business cycle plus shocks story. As with every great epic the main characters aren't always who they appear to be at the start. My favourite image from classical literature has always been that of the return of Odysseus to Ithaca, arriving dressed as a beggar to receive only scorn and contempt, before finally revealing himself to see-off definitively Penelope's suitors. Don't worry if you haven't caught onto what I'm getting at. Hamlet will soon be on stage for all to see, and the mystery variable will be revealed. Otherwise forgive my indulgence, it was the talk of war, pestilence (sorry uncertainty) and disease that put me in mind of classical Greece.

War, uncertainty, and disease are a tough combination for any economy. But for an unbalanced and vulnerable world, this confluence of shocks hurts all the more. For the industrial world as a whole, an economic contraction now appears to be under way. Moreover, we are adjusting downward our baseline estimate of overall world GDP growth for 2003 to 2.4% -- an outcome that would take the world economy through its official recession threshold of 2.5%. A global double dip may now be at hand.

The major economies of the developed world appear to have contracted in February and March. Not only is that true of industrial activity in the United States, Europe, and Japan, but most major barometers of service sector activity in these same countries are now flashing similar signs of weakness. Moreover, around the world, labor markets are softening, higher energy prices are sapping consumer purchasing power, and capital spending projects are being put on hold. And now Asia has been hit hard by the outbreak of a virulent new disease -- severe acute respiratory syndrome (SARS) -- that has brought tourism, travel, and entertainment to a virtual standstill in this once-resilient region. Yes, there is always a good deal of statistical noise in extracting meaningful information from month-to-month changes in any economy. In this instance, however, the data fit all too neatly with the script of a world in shock.

Nor should this dip be viewed as just a two-month statistical fluke that will end the moment that Baghdad falls. Our baseline forecast currently points to a world economy that is likely to record “zero” to slightly negative real GDP growth in the second quarter of 2003. For the current period, we are projecting outright contractions in Europe and Japan that could more than offset fractional growth in the US and elsewhere in the world. Moreover, with SARS-related disruptions hitting Asia exceedingly hard at the moment, the risks to our second-quarter estimate are decidedly on the downside. As the flow data comes in, we will, of course, adjust these estimates accordingly. As it stands today, however, our forecast of record paints a picture of a world economy that is likely to be exceedingly weak in the first half of 2003. Whether that weakness ultimately takes the form of stagnation or cumulative contraction is still an open question. But the bottom line is that we are debating degrees of weakness -- not strength -- for an already vulnerable global economy.
Source: Morgan Stanley Global Economic Forum
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Since I've set off on this, I'll let Thucydides have the last word:

Such was the funeral that took place during this winter, with which the first year of the war came to an end. In the first days of summer the Lacedaemonians and their allies, with two-thirds of their forces as before, invaded Attica, under the command of Archidamus, son of Zeuxidamus, king of Lacedaemon, and sat down and laid waste the country. Not many days after their arrival in Attica the plague first began to show itself among the Athenians. It was said that it had broken out in many places previously in the neighborhood of Lemnos and elsewhere; but a pestilence of such extent and mortality was nowhere remembered.Neither were the physicians at first of any service, ignorant as they were of the proper way to treat it, but they died themselves the most thickly, as they visited the sick most often; nor did any human art succeed any better. Supplications in the temples, divinations, and so forth were found equally futile, till the overwhelming nature of the disaster at last put a stop to them altogether.


Nor was this the only form of lawless extravagance which owed its origin to the plague. Men now coolly ventured on what they had formerly done in a corner, and not just as they pleased, seeing the rapid transitions produced by persons in prosperity suddenly dying and those who before had nothing succeeding to their property. So they resolved to spend quickly and enjoy themselves, regarding their lives and riches as alike things of a day. Perseverance in what men called honor was popular with none, it was so uncertain whether they would be spared to attain the object; but it was settled that present enjoyment, and all that contributed to it, was both honorable and useful. Fear of gods or law of man there was none to restrain them. As for the first, they judged it to be just the same whether they worshipped them or not, as they saw all alike perishing; and for the last, no one expected to live to be brought to trial for his offences, but each felt that a far severer sentence had been already passed upon them all and hung ever over their heads, and before this fell it was only reasonable to enjoy life a little.
Source: Thucydides Book 2: The Plague in Athens (excerpted)
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As Brad Delong so often notes, we're fortunate today in that we have modern medicine, but it's only useful when we know how to use it.