Economy: No Smooth Path
To Growth In 2004
By Nick Beams
03 January 2004
to the latest indices, prospects for the world economy are brighter
than at any time over the past five years. Stock markets have been on
the rise with Wall Street enjoying its best year since 1996 and Tokyo
its best since 1986; the US economy is experiencing a recovery, with
growth predicted to be between 3 and 4 percent over the next year; the
Japanese economy is showing signs of expansion; and recessionary trends
appear to be easing in Europe.
In a recent editorial,
the Financial Times even held out the prospect that for the US there
could be a return to the Goldilocks economythat period
in the late 1990s when it was claimed growth was just right,
that is, not to great to bring inflation, yet large enough to ensure
an expanding jobs market.
If one probes beneath
the action on the stock markets and the immediate economic data, however,
it is clear that far from embarking on a smooth path to growth, the
world economy has entered a period of profound disequilibrium.
At the heart of
this destabilisation is the indebtedness of the United States which
accelerated in 2003. The current account deficit for the year is expected
to reach a record $550 billion, equivalent to more than 5 percent of
gross domestic product (GDP), taking the US external debt to around
$3 trillion, or close to 30 percent of GDP.
In a speech on monetary
policy delivered on November 20, Federal Reserve Board chairman Alan
Greenspan pointed to the growing concern over the current
account deficit and the possibility that the rising stock of external
debt could become increasingly more difficult to finance.
With the ratio of
external debt to GDP currently rising at the rate of 5 percentage points
a year, Greenspan warned that while the financing of this debt had so
far been seemingly uneventful there would have to be future
adjustments if it continued to rise. How much further,
he asked, can international financial intermediation stretch the
capacity of the world finance to move national savings across borders?
A report issued
by the Financial Markets Center shows the extent of this operation.
In 2002, it noted, net capital inflows to the US were $528 billion,
representing 75.5 percent of net capital outflows from the rest of the
world. The figure for 2003, given the widening in the current account
deficit over the past 12 months, is likely to be even greater.
by the Japanese government on intervention in currency markets aimed
at trying to stabilise the value of the yen give another indication
of the size of the financial flows. Seeking to slow the rise of the
yen against the dollar and thereby protect export markets, the finance
ministry spent a record 20,057 billion yen (equivalent to more than
$180 billion) this year, more than two and a half times the previous
record set in 1999.
are planned with the finance ministry announcing that it would raise
the amount it can borrow for currency interventions until the end of
the fiscal year in March by 21,000 billion yen to 100,000 billion yen.
For the fiscal year starting in April, the borrowing limit has lifted
by 61,000 billion yen to 140,000 billion yenthe increase being
almost equal in size to the US current account deficit.
The massive Japanese
intervention is only the most graphic expression of a process which
has become the dominant feature of the international financial system.
As the US dollar comes under pressure in international marketsit
has fallen on average by about 11 percent this yearAsian central
banks are intervening to try and prevent a rise in the value of their
currencies in order to protect their export markets. In turn, their
purchases of US dollars finance the balance of payments deficit and
the US federal budget deficit which is set to go over $500 billion.
An article by global
economist David Hale in the Australian Financial Review of December
29 pointed out that east Asian central banks now hold 70 percent of
the worlds foreign exchange reserves of $1.7 trillion. They have
invested some 80 to 90 percent of these reserves in the US government
bond market and are effectively funding the US budget deficit. So far
the financing operating has proceeded relatively smoothly. But if the
central banks were to rapidly withdraw their funds, either for political
reasons, such as retaliation against protectionist measures initiated
by the US, or because of fears of a collapse in the dollars value,
a major financial crisis would result.
Analysing this process
in an article entitled Upside down logic, published on December
28, Financial Times columnist John Plender noted that the world economy
was now engaged in an unprecedented high-wire experiment.
chiefly on private capital to finance the deficit in the late 1990s,
the US is now dependent on official flows from Japan, China and other
emerging Asian economies to keep its fiscally profligate, dollar-denominated
show on the road. This is the opposite of the way global capital behaved
in the earlier episode of free capital flows before 1914. Then the UK
ran huge surpluses on external accounted and exported capital to developing
countries. Today, the worlds richest economy has turned this logic
on its head. So we have a paradox ... of a unilateralist-inclined America
depending for its high domestic consumption and pursuit of interventionist
foreign policy on the largesse of such implausible friends as the Peoples
Republic of China.
of the world economy is reflected not only in financial data but also
in growth figures. According to Morgan Stanley global economist Stephen
Roach, over the period 1995-2002 the US accounted for 96 percent of
the cumulative increase in world GDPsome three times its 32 percent
share of the global economy.
Describing the world
economy as very much in a state of fundamental disequilibrium,
Roach noted that an unprecedented disparity has opened up
between nations with current account deficits, principally the US, and
those with surpluses, Asia and to a lesser extent, Europe. Not only
are such global imbalances unsustainable but in the US, a lasting
recovery cannot be built on a foundation of ever-falling saving rates,
ever-widening current-account and trade deficits, and ever-rising debt
It is impossible
to forecast exactly how these imbalances, and the tensions they generate,
will unravel in 2004 and beyond. But one thing can be said with certainty:
the longer the world economy continues on the present path, the greater
will be the underlying disequilibrium and the possibility of a major