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| August 25, 2003 | Monday | Jumadi-us-Sani 26 |
World economies report
A rebound in the US after the Iraq war now appears to have vindicated the optimists. The US recovery could gather pace over coming months as the companies that cut stocks to the bone in the uncertain period around the war, order new inventories. There are tentative signs of improvement in the euro-zone, with the economists encouraged by the rising business confidence and a growing willingness by the policy-markers to engage in structural reform.
Yet many global economists argue that, after an initial spurt, the growth could continue to be sluggish. But it remains hard to make a convincing case that there would be really robust growth over the next few years. The fundamental problem remains the legacy of the boom years. This is most evident in the US. Over-investment during the late 1990s significantly raised the capacity of the US businesses. As demand has slackened, the result has been a large output gap — the difference between the actual and potential production. As a result the US should be able to grow as fast as 4 per cent for more than two years before the downward pressure on inflation starts to abate.
Two years after the 2001 recession, the US private sector employment has fallen by more than 2.5 million. The unemployment rate at 6.2 per cent, is about 2 percentage points higher. It may take some time before the US companies start adding significantly to their payrolls. The US households have their own excesses to work off. Americans are still saving just 3.3 per cent of their disposable income — much less than a historic average of 6 to 10 per cent. Without a relatively swift recovery in employment, the US households may be tempted to step up savings.
There are signs that the Japanese domestic consumption has been picking up. The household savings rate is now down to 6 per cent versus 16 per cent in 1989 and deflation shows the evidence of abating. But the second quarter growth figures showed that the exporters remain by far the most dynamic element of the economy — representing a third of the total growth. Rising foreign demand is also likely to have been behind the pick-up in Japan’s business investment, which rose 1.3 per cent on the quarter. The economic recovery in Japan remains substantially dependent on an acceleration in the US. Nor is the euro-zone seen as a potential stand-in as global leader if the US disappoints. Economists have been encouraged by moves towards structural reform in Germany in particular.
If the US continues to grow faster than the rest of the world, the ballooning US current account deficit should widen further. The US current account deficit is expected to reach about $623 billion in 2003 — requiring the US to attract around a net $2.4 billion of overseas capital every working day. While this need not be a problem while the world is hungry for the US assets, there are signs that private sector demand is weakening. In the second quarter, dollar purchases by Asian central banks funded almost half the US deficit. Another sharp fall in the dollar would cramp euro-zone growth and in the extreme could prompt a rise in the US interest rates, as foreign investors cut their holdings of the US bonds.
President Bush has also signalled confidence of a turnaround in the US employment market, forecasting that an economic recovery fuelled by the effect of recent tax cuts would help people find jobs. The president was confident that the tax cuts would begin to have an impact on the economy, and help people looking for work. The budget deficit was caused by the recession and the best remedy to the deficit was growth. Alan Greenspan, the chairman of the Federal Reserve, has however, called for careful spending.
Latin Americans are worse off now than in 1997, according to a report published by the United Nation’s Economic Commission for Latin America and the Caribbean (Eclac). The report said “six lost years” of depreciating currencies, faltering global demand, weak domestic activity, and financial, political and fiscal crises combined to hold average per capita gross domestic product (GDP) to 2 per cent below 1997 levels.
However, there are signs of a weak year-on-year recovery for 2003, with regional growth forecast at 1.5 per cent, compared with a 0.6 per cent contraction in 2002. This outlook, however, was less encouraging than at the beginning of the year, when Eclac was predicting the GDP growth of 2.1 per cent for 2003, based on the assumption of a short war in Iraq, a speedy recovery in global export demand and a significant fall in oil prices.
Despite global weakness, there would be a 4.4 per cent pick-up in the value of exports, although the comparison with 2002 is “a long way from being demanding”. Of the 19 countries mentioned in the report, Argentina, Chile and Peru were expected to post the strongest GDP growth, while Venezuela — which remains torn by civil unrest — would see its output shrink by 13 per cent, after a 9 per cent contraction last year. However, despite recovery in Argentina, the GDP per capita would end the year 17 per cent below the 1997 level.
In 2002, the region experienced its worst downturn in 20 years, although there were significant differences between the countries. Growth slowed in many countries, particularly Argentina and Venezuela, but picked up in Mexico and Peru. The adverse global environment affected many Latin American countries, especially those that relied on financing from the international capital markets. Countries with stronger policies, such as Chile and Mexico, weathered the crisis better.
Three elements are considered particularly important. Increasing the economy’s resilience to crisis by achieving low inflation, which will require, first and foremost, placing public financing on a solid footing, strengthening the institutions that underpin a market economy and implementing structural reforms to raise economic growth potential and addressing issues of social equity and government to buttress popular support for reform.
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