SINGAPORE, Nov. 4 (UPI) -- President George W. Bush can bask in the glory of winning the elction for now, but he may have to sober up soon, given the outlook for the global economy next year. For one, he will have to tackle the burdgeoning U.S. current account deficit, which will require Asian economies to get their currencies appreciate against the U.S. dollar, and reflect their true market value. Yet it is unclear whether they are willing to do so and jeopardize their advantage.
"The forces that are driving the world economy over the next year or so have been pre-ordained. These are events that have already taken place, like higher oil prices and mounting global imbalances," Stephen Roach, Morgan Stanley's Chief Economist said while in Singapore.
"Whether it would have been Bush or Kerry, the economic outlook for the United States, and therefore the U.S. centric global economy, would have been very tough in early 2005. It makes no difference. The U.S. and global economies are now afflicted by significant imbalances, which are considerably worst than 4 years ago when President Bush was first elected into office. And it's all personified in America's balance of payment deficit, which is 5.7 percent of GDP and rising sharply further as we speak," he added.
Many economists are indeed warning that it will get tougher and tougher for the U.S. government to finance this deficit without a significant correction in the U.S. dollar or interest rates. The problem is compounded by the pressure of sharply higher oil prices, which further exacerbate the downward pressures on the U.S. and global economy, they said.
While President Bush had tremendous fiscal flexibility in 2000 when he inherited a budgetary surplus in excess of $200 billion, he has no such manoeuvring room this time around. The American budget deficit is now at $415 billion, two-thirds of which is due to the tax cuts, and the official estimate of the cumulative deficit over the next decade is now $2.3 trillion.
"Along with the lagged impact of Fed tightening and a higher energy price environment, the prospect that fiscal policy turns from stimulus to drag is bound to keep a lid on GDP growth in the coming year," noted David Rosenberg, chief North American economist for Merrill Lynch.
A centerpiece of Bush's domestic agenda is the partial privatization of social security, but the challenge here will be the cost, an estimated $2 trillion over 10 years which would significantly add to the current forecast of a cumulative deficit over the next decade.
The president advocated during the campaign another round of tax cut to make last year's temporary ones permanent. "That's reckless, irresponsible, they can't fund it and they should take that proposal off the table," warned Roach.
While the ballooning twin deficit (current account and budget) of the U.S. is a major concern, the other one is the extremely high level of personal consumption in the U.S., which has not supported by improving fundamentals, like employment and salary growth, but by artificial government measures like keeping interest rates low and cutting taxes.
"Americans are addicted to shopping and it's a progressive disease, which is now in its final stage," Roach told a large audience of Morgan Stanley clients.
"U.S. consumers shouldn't be spending as much. It has been a jobless recovery. Indeed in 34 months of recovery, jobs are only up 0.4 percent. I'm surprised (Senator) John Kerry wasn't able to make more out of these figure," Roach said, confessing he had voted for the democrat.
U.S. consumers' wallets have been powered by their savings, which have been depleted in recent years, as well as heavy borrowing.
Roach pointed there were only two counter-cyclical measures that could be taken to put a lid on consumer consumption: raising rates and fiscal policies.
Given that the Federal Reserves has already raised interest rates 3 times this year, which has had no impact on consumers, it will need to tighten more aggressively to get a result. But that window of opportunity has shut because of the negative consequences of higher oil prices. "Right now, it would trigger a recession, so they're stuck," Roach noted.
Economist point there has been a policy decision by the United States' Asian trading partners to fund the U.S. imbalances. In the name of keeping Asian currencies cheap to help Asian exporters, regional central banks have supported the U.S. dollar by buying massive amount of U.S. Treasury bills, thus financing the current account deficit.
A sharp weakening of the dollar would also drastically affect their reserves level that are all denominated in dollars.
"If Asia starts to reduce its purchases of dollar-denominated assets then long over-overdue current account adjustment will commence. Asia and central banks' purchases of dollar denominated assets have been the reason why the current account adjustment process has been short-circuit and has not occurred," Roach said.
Komal Sri-Kumar, the Los Angeles-based managing director at Trust Company of the West, a unit of SG Asset Management, estimates that Asian central banks have over $48 billion in foreign exchange holdings, but pointed it will be difficult for them to find where to move their dollars.
"Asian central banks are not looking at the return they're getting for their money they're trying to support their exports," he said recently while in Singapore.
Most economists agree that Asian exporters are likely to wait for China to let its currency appreciates against the dollar, before doing the same. While the timing of a yean re-evaluation is unsure, some economists have been venturing guess it could happen in the first quarter of next year.
But if they don't, they are likely to start facing protectionist measures against their exports from America, but also Europe, Roach warned.
Asian central banks may be torn between tolerating a strengthening currency to control inflation and softer export growth. Countries with high imported inflation and resilient domestic demand conditions such as India, Indonesia, and the Philippines are likely to tolerate relatively more
currency appreciation than export-driven economies such as Korea, Singapore, and Taiwan, said CSFB economist Sailesh Jha in a research note.
