Three economic zones, all with plenty to worry about
Tuesday 02 September 1997
We live in a connected world, for the world economy is more of a single entity than ever before in human history. But as people in the three main economic zones look forward, they will look forward with different concerns. In North America the main economic issue is whether the US economy really has stepped into a new period of sustainable, steady growth or whether there is another recession somewhere ahead. In continental Europe the coming months will be dominated by the progress towards the single currency and the difficulties this will impose on the main continental economies, at least in the short term. And in the East Asian time zone the issue the clear new issue is whether the present currency and market turmoil heralds something more serious in the real economy of the countries concerned.
In the coming weeks expect these three themes to keep recurring, so it might be helpful at this stage to set out some checklists for each of the three zones - things to watch for, things to worry about.
As far as the US economy is concerned, the analysts fall into two broad groups: those who believe that this time things really are different; and those who think nothing much has changed. But that is just convenient shorthand, for it is not a simple question of whether the economic cycle has become much more muted, or whether the vigour of the new service industries will enable sustained non-inflationary growth to carry on for the foreseeable future.
Clearly some things have changed: for example it has been possible to push unemployment down much further than anyone had expected without giving rise to wage inflation. The only possible justification for the present level of the US stock market is that there has been a sea-change in the performance of the economy.
But it is equally plausible that while the economy has indeed lifted its performance a gear, there is still a serious rebuff ahead. Or to put the same fundamental point from a slightly different perspective, that while the trade cycle may indeed be more muted, it still exists. Since even a modest reversal of fortune is not priced into equity markets at the moment, there is clearly going to be some sort of market reversal in the next few months, most probably before the end of this year, almost certainly before the middle of the next one. No one can see in detail what will happen, but clearly something disagreeable will take place. Once it does, the test then will be how well the real economy withstands the financial pressure of rising interest rates and falling share prices. It all may turn out fine - a bumpy year but not a dreadful one, followed by renewed growth in 1998 and 1999. But of course it may not.
On the Continent the issue is different because instead of there being too little slack in the economy there is too much. (Leave aside the UK, which is a special case.) The French and German economies are now growing, and after renewed recession this year the Italian one seems to be moving too. But the recovery is fragile, and there will be no material decline in unemployment in the main continental economies during the next 18 months.
The plan for the single currency imposes an additional layer of uncertainty. Whatever view one takes on the wisdom of the project, EMU will dominate European markets for the next 18 months. Though non-combatants like the UK may feel "over-EMUed" there will be no escape from devoting resources to the practical issues it raises.
So whether they like it or not, anyone wanting to do business in the rest of Europe will have to pull resources away from running the rest of the business to making sure it is EMU-capable. This is partly a question of fixing systems - just at the time when computers have cope with the millennium bug. But it is also a question of business strategy - and since space of mind devoted to making ready for EMU is space of mind not available for anything else, in the short-term the competitive impact on European business is entirely negative. That is not to say the whole project is misguided, for that is a separate issue; it is to say that the timing could hardly be worse.
In the third time zone, East Asia, the bumps have become obvious in recent weeks. Leave aside Japan for the moment, where the long pull out of recession even now remains in question and focus on the "tigers". Six months ago all was triumph: the story that the next century would be dominated by Asia, just as the present century has been dominated by North America and the previous one by Europe. Now the tone is more of fear, dismay or (in the case of Malaysia) xenophobia.
Wise outsiders have long questioned the euphoria which has surrounded these tiger economies, but the speed and ferocity with which markets are reacting and the contagion between them has come as a surprise. This raises a tough question, of which we will hear more in the coming weeks. Economic disruption in East Asia clearly matters for them, but does it matter for us?
The answer is probably not, but only probably. It is quite difficult to see recession in East Asia seriously disrupting the economies of Europe and North America. It is not yet a sufficiently big player in international trade for it is not yet a dominant market for European and North American goods. There is a parallel with Japan. Look at the way in which recession in Japan has not had any significant effect on the economies of the rest of the world, and Japan remains a bigger economy even than China. (At current exchange rates, as opposed to purchasing power parity, Japan is bigger than the whole of the rest of the East Asian time zone put together.)
So even quite severe economic disruption should not matter directly, at least on a one or two-year view. On a five-year view, however, there would be real concern, for the world economy would be losing its most vibrant region. If what we are seeing is more than just growing pains, then we should start to worry more. But at least there is a clear question here: is it growing pains, or something more?
No answers, I'm afraid. What can sensibly be said, though, is that this will be a tetchy, difficult autumn for the world economy, different in quality both from the summer and from the optimism of the spring. Expect some of that tetchiness to show itself here, once those windfall gains fade into memory, and policy leans harder against the boom.
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