Wednesday, May 07, 2003
Infecting the global recovery
Posted by David Smith at 09:21 PM
Category: David Smith' s magazine articles

As far as the world economy is concerned, it appears to be a case that when one door opens, another slams hard in your face. Barely had businesses got used to the end of the war with Iraq than along came SARS (severe acute respiratory syndrome) to pose a new uncertainty.

The impact of SARS, on certain Asian economies and on the travel and tourism industries, is potentially serious. Hong Kong, in the grip of a prolonged property bust and already suffering deflation, is in the eye of the storm. Before SARS, economists thought the Hong Kong economy could grow at a respectable 3%-4% rate this year. Now, with the tourists and shoppers staying away, they think it will struggle to grow at all.

Elsewhere in Asia, the impact of SARS is also to downgrade prospects, although not as dramatically as in the case of Hong Kong. Asia ex-Japan will still probably grow at a reasonable 4%-5% rate this year but 6% or more was in prospect before the virus struck. Leading forecasters at the OECD, IMF and World Trade Organisation are either revising down their numbers, or warning of enhanced risks.

SARS has also opened the window on China. It has provided a reminder that there is more to China than just a giant magnet for foreign direct investment, and a growing competitive threat – last year it overtook Britain as the world’s fifth largest exporter (behind America, Germany, Japan and France).

China, as the place where SARS started, is suffering directly – economists at Goldman Sachs say growth, which has averaged 7%-8% in recent years, and was 9.9% at an annualised rate in the first quarter, might end up at only 6% this year, its weakest for several years.

Behind the immediate disruption, a question of trust has also emerged. China did not tell the world about the dangerous SARS virus and, when the world became aware, insisted it was under control. This was confirmation, were it needed, that China is a long way from being an open society. For businesses entering long-term relationships with China, this lack of openness remains a concern. SARS has proved that China has much further to go if it is to be a trusted partner as well as a competitor. In all likelihood the virus will prove to be only a blip on the country’s rapid development, although for that to happen the authorities have to take heed of the lessons the episode has provided.

Will we remember SARS in a year’s time? Probably not, except perhaps as an inconvenient interlude after the end of the second Gulf war. What we will remember is a pretty subdued world recovery. It is a fact that when economic growth is strong, it can take wars and other shocks in its stride. Only when underlying growth is weak to we dwell on the economic danger from unexpected developments such as SARS.

Global growth is weak, and the causes are closer to home than China and the other Asian economies. The euro’s appreciation has provided welcome relief for British exports, and offers a reasonable outlook for the coming months, despite weak overseas markets. But the effect in the euro area has been exactly the opposite.

Deutsche Bank predicts euroland growth of just 1% this year, with only a gradual improvement next year. The National Institute of Economic and Social Research says the effect of the euro’s rise has been to redistribute growth away from Europe to the United States. Add in the fact that Japan appears to have hit new troubles and the world economy is a couple of cylinders short of running at full power. A “normal” year for the world economy is 4% growth. As recently as 2000 growth was 4.7%. This year the National Institute expects below-par growth of just over 3%.

This, unfortunately, is the way it is going to be. After the strong American-led global expansion of the 1990s, a period of correction and consolidation was always likely. With America’s current account deficit at a record $500 billion and US households seeking to repair their balance sheets after the excesses of the past, the economy is in no position to act as the kind of powerful locomotive to global expansion it has been before. The world’s only superpower, in addition, has no serious rival for this locomotive role.

That does not mean we should despair. As both Gordon Brown and Alan Greenspan , the Federal Reserve Board chairman, have said, the global economy will gradually pick up momentum in the second half of the year, and should be stronger next year. But neither the end of the war with Iraq or the containment of SARS will provide a panacea. More than anything else, reinvigorating the world economy requires time.

From Industry magazine, May 2003

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