QUERETARO, Mexico, Oct. 26 (UPI) -- Listen to them at the market. Their talk is often amusing. Brokers complain about the "noise" that keeps deterring investors. The "noise" is war and a recession that will soon afflict the world's two largest economies.
How easily investors are distracted from the serious business of boosting brokers' commissions. And what is the brokers' own "noise," their line on the big picture? It can be summed up easily. The economy is weak now. In six months it must be better. Buy!
Meanwhile the profound trends move on and are both predictable and disturbing. "Growth in world merchandise trade is expected to slow in volume terms to only 2 percent in 2001 -- compared with 12 percent in 2000. Even this growth is not assured given the present great uncertainties about economic and trade developments."
These are the words of the World Trade Organization which issued its latest International Trade Statistics report Thursday.
Trade is a good thing. The globalization protesters to the contrary, it spreads growth and development. Some evidence for that comes from the WTO report. "The estimated 15 percent increase in the volume of merchandise exports from developing countries [in 2000] was three times faster than their GDP growth, and their shares in world trade and output continued to increase as it has done throughout the 1990s ... . Developing countries accounted for 27 percent of world exports of manufactures in 2000, a remarkable increase from their 17 percent share in 1990."
Of course, those who oppose globalization might argue that this growth in trade does not benefit the poor, and it is true that the socio-political and economic issues that can stop wealth spreading within poor countries are complex. Yet a simplification can be made: in a growing economy, even if the distribution of wealth is poor, the poor are more able to improve their lot than in a stagnant one. And, without trade, an economy is likely to stagnate.
Trade is good but in a recession it also spreads the downturn. It explains why the world economy moves in a cycle, growing together, and also falling together. It also helps to explain why, after a decade of uninterrupted growth, the downturn occurring now is unlikely, for all the wishful analysis of Wall Street, to be over in six months.
All three of the major economies, the United States, Japan and Europe, are weak at present. Lack of demand for imports in the United States and Japan and Europe is going to pass on economic malaise to emerging economies; it is already doing so. And this in turn will hurt the big economies, for emerging economies will lack the revenues with which to buy the exports of developed economies.
Obvious? Yes. And yet it is a point that is being missed by those who keep predicting recovery just round the corner. The global cyclical slowdown seems to have been with us a long time but it is just beginning. In the third quarter of this year U.S. growth is likely to be negative for the first time in the slowdown so far. And after an unusually long period of buoyant -- perhaps we should say "bubbly" -- growth it may be that the slowdown will be deeper and longer than usual.
Trace the steps in the process. The WTO report points out that in the second quarter of this year U.S. exports and imports were lower than a year earlier. Demand is falling in the world's biggest economy and in the economies of most of its trading partners.
Another measure of demand in the global economy comes from oil. The assessment of the Economist Intelligence Unit in London is that in 2001, North American oil demand will contract by 0.3 percent, while the OECD-Pacific region falls by 0.1 percent and Latin America by 0.4 percent. For the world as a whole, the EIU foresees "global oil demand inching up 0.4 percent in 2001 and 0.8 percent in 2002," but it warns that this forecast is based on a relatively benign view of the world economy and "a more severe situation may emerge, whereby global demand [for oil] actually falls."
The last time global oil demand fell was in 1980 (and in 1981 and 1982) after the second oil price shock (in 1979). Then, of course, oil prices were raised substantially by concerted action by OPEC, so it is perhaps less surprising that oil consumption dropped. (And world consumption of oil was then much higher in relation to GDP because fuel efficiency had not been of great concern.) This time round -- and this is perhaps an indication of the severity of the coming downturn--the drop in demand for oil is occurring even as prices fall. The price of West Texas Intermediate, one of the main crude oil benchmarks, is now more than a third down on a year earlier. Oil prices have dropped below OPEC's $22-$28 target range.
Where commodity prices are concerned, oil is proving a frontrunner. According to The Economist magazine's commodity price index, metals prices are down by 21.9 percent in the past year, non-food agricultural prices by 17.5 percent, and food prices by 7.7 percent (all in dollar terms). This is the trend that hurts developing economies: the fall in commodity prices.
Most emerging economies depend heavily on commodity exports. A decline in commodity prices impoverishes them. Often it leads to falls in their exchange rates which reduce their capacity to import. And that, in turn, feeds back into developed countries' exports of manufactures.
Some of the Asian economies are not so commodity dependent. Taiwan and South Korea, for example, are huge exporters of electronics. But their vulnerability to the current downturn has so far been greater than that of the commodity exporters. The collapse in demand and prices for silicon chips and other technology products has hurt their exports, industrial production and growth severely.
In tough times for emerging economies investors prove poor friends. According to a September report on capital flows from the Institute for International Finance in Washington, "Net private capital flows to emerging market economies are projected to fall sharply this year to about $106 billion from $167 billion last year due to heightened risk aversion." Lower capital flows exacerbate the drop in the export earnings in emerging economies. They are left with financing difficulties that may lead some towards financial crisis. Argentina is already well down that route. Brazil may follow next year. Will some of the export-oriented Asian economies?
In turn, the lack of cash in emerging economies reinforces the downturn in the West. Western companies struggle to make profits in emerging economies. Western investors lose money there. Meanwhile in developed economies themselves some of the lending that has accompanied the boom period turns bad. This, too, is another part of the recessionary process that has hardly yet begun: the rise in bad debt, the purging of bad loans.
What is the way out? There are many calls now for concerted policy action. And certainly it makes sense to loosen monetary policy when growth slows, though the Federal Reserve Chairman, Alan Greenspan, may already have taken this too far.
For, painful though the slowdown is, trying too hard to prevent it may be a mistake. Recession enforces change and some of the change it enforces is necessary. U.S. consumption and the U.S. trade deficit could not spiral up indefinitely, nor could the stock prices that provided the cash for the spending boom. After a boom a downturn cannot always be avoided. Fortunately, it, too will end--but not in six months' time.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments welcome. [email protected]
