Outlook: Will US pull us out of the fire or into the mire?

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The Independent Online

One question dominates proceedings at the World Economic Forum annual meeting here in New York: is the US still capable of bailing out the world economy, as it has so often in the past, or will it lead the rest of us further into the mire of global recession?

There's agreement on one thing at least among the assembled business leaders, politicians, policy makers and economists. Like it or not, it will be what happens in the US, the largest economy in the world, that determines the outcome for everyone else. The US led the world into recession, and it will be the US that eventually leads us out again.

Fast back a year to the WEF's last meeting, held in its traditional home of Davos, a Swiss alpine resort, and there was a widely held belief that Europe could be relied upon to take up the baton of global economic leadership as the US collapsed exhausted after its astonishing eight-year boom.

Those hopes have been dashed by a year of barely perceptible European growth. Europe has failed to fill the void left by the US, and without wide-ranging structural reform, for which there appears little appetite in Europe's economic heartland of Germany and France, it doesn't look like doing so any time soon.

We have been living for most of the post-war period in a US dominated global economy, and despite the events of 11 September, that seems destined to remain the case for some years to come.

That, however, is where the consensus ends. Americans are incurable optimists, and the hope is that by the second half of this year, some kind of an economic recovery will be under way in the US. But is it really going to be as robust and sustained as many Americans believe? Is it possible, after all that has happened, that America will after barely a blink simply return to the way it was during most of the 1990s?

There is good reason for scepticism, and it is perhaps best articulated by Stephen Roach, chief economist of Morgan Stanley. Mr Roach is a self proclaimed apostle of the so-called "double dip" theory, which has it that after a valiant attempt to struggle off its sick bed, the US economy will slump back down again, overwhelmed and exhausted by the excesses of the last boom.

No one doubts or underestimates America's capacity for hard work, flexibility and innovation, but for Mr Roach, its balance sheet is just too badly damaged to allow a rapid bounce back.

There are no personal savings left to speak of, high levels of debt, both personal and corporate, abound, the stock market still looks profoundly overvalued, overcapacity remains the norm in most industries, and on top of everything else, there is a massive current account deficit.

Is it really credible that the US economy can return to the boom conditions of the late 1990s? Mr Roach thinks not. Despite the downturn, America continues to spend more than it earns on an unprecedented scale. Eventually something will have to give.

The figures look alarming. If America is to regain its position as the locomotive of world growth, then the deficit will need to rise from the present 4 per cent of GDP to 6 per cent by the end of 2003. That equates to a massive $660bn annually, or $2bn a day including Saturdays, Sundays, Christmas and Easter, that will have to be financed somehow or other. Somehow or other means you and me – the foreign investor – for it is the international capital markets that bankroll the deficit.

Up until now, foreign investors have been happy enough to finance American over indulgence, but now the boom has turned to bust, will they prove so accommodating in future?

Well, so far the evidence doesn't support the Roach diagnosis. Despite all that has happened, the dollar has continued to strengthen, and for the time being, Europe and Japan are still considered to be poor alternatives for capital investment.

Indeed, the willingness of foreign investors to finance the American deficit has defied all predictions, and what's more, there's little evidence of the capital market's appetite for all things American waning. Boom or bust, the markets prefer America to what is seen as the even more unappealing alternatives. The WEF's decision to relocate to New York seems a symbolic case in point. Post 9.11, the event was threatening to die on its feet. If America wouldn't come to Davos, Davos had to go to America.

So Mr Roach's view is surely too pessimistic, is it not? Well perhaps, but the bull case seems equally implausible. This was most dramatically put here in New York by Gail Fosler, chief economist of the Conference Board, a respected economic forecasting group. Without the slightest hint of self doubt, she forecast that the US economy would be back to 4 per cent growth next year. Was the dollar riding for a fall, as Mr Roach suggested? "No chance", she said. In fact it had another 5 to 10 per cent of upside before any correction seemed likely. Corporate profits were, meanwhile, poised for a "stunning" recovery, if only because productivity had continued to improve right through the downturn. No worry here about the counter effects of higher levels of security, or the higher levels of unproductive public spending, which have been ordered to help address the downturn.

Well, it would be nice to think that after a cathartic pause for breath, everything will soon return to the way it was, and perhaps it will, but that hardly seems the most likely outcome. In fact, some speakers are saying, the technology bubble has made it almost impossible. Towards the end of the 1990s, there was an extraordinary boom in capital spending, with IT expenditure rising from 16 per cent of the total to nearly 60 per cent. Companies were mindlessly chasing each other on IT spending as if engaged in some latter day arms race.

Substantial gains in productivity have been achieved as a result, but the benefits have gone not to shareholders, but to consumers. In their dash to invest in all the latest technology, companies bought the same platforms, used the same IT consultants, and went to the same IT conferences. It made companies much more competitive but it didn't give them a competitive edge, in the way business investment perhaps has in the past.

So who is right? When there are two such extremes of view, the truth generally lies somewhere in between. Neither the Roach view, nor the Fosler one wholly convince, well argued though they are.

The reality is that rapid recovery from recession is virtually unheard of. Why should the present downturn buck the trend. Recovery happens slowly and to begin with is barely perceptible at all. Along the way there are lots of false dawns.

Is America bust? Despite the shock of 9.11, Enron, and the bursting of the technology bubble, surely not. But is it going to boom again soon? Few business leaders at the coal face of productive activity would believe that. The final word must go to Edward Zander, chief operating officer of Sun Microsystems. "In the boom it's never as good as they tell you, and in the bust it's never as bad as it seems." Amen to that.

j.warner@independent.co.uk

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