Economic Ills in U.S. Likely to Influence Rest of World
The ailing global economy suffered a blow Sept. 11 that is likely to slow growth to the lowest levels in two decades as jittery companies from New York to Tokyo are forced to hibernate during what is expected to be a hard winter, according to financial experts.
In a world of gyrating stock markets and battered confidence, economists are trying to steer clear of emotionally charged words like recession.
But the latest figures from several international agencies confirm that international trade and investment flows are expected to decrease dramatically in the coming months, cutting at least 2 percentage points and probably more off the growth of the global gross domestic product, or GDP, which grew at 4.8% last year.
“I’d prefer to call it global stagnation because recession implies a more extreme downturn,” said William Cline, chief economist for the Institute of International Finance, a think tank in Washington that predicts a mild recession for the U.S. in the second half of this year and a sharp contraction in emerging markets. “But extremely sluggish global growth is what you’re talking about through at least the second quarter of next year.”
The International Monetary Fund, which releases its global projections today, insists that the world will stay above the 2.5% annual GDP growth level that is generally used to define a global recession. That optimistic view is largely due to continued expansion in China and, to a lesser degree, in India. The two nations are home to about a third of the world’s population.
But neither of those large, inward-looking economies are able to play the role of global locomotive to a sagging world economy, and their strong domestic growth masks worrisome weaknesses in other parts of the world, according to economists.
“You’re not going to have a global boom premised on exporting to China,” Cline said.
The faltering U.S. economy is expected to hurt principal trading partners such as Mexico, which is already in recession, and Canada, which like Europe is reporting growth at close to zero. The Sept. 11 attacks on the World Trade Center and Pentagon will also be felt in Latin America, which has been under financial pressure, and Africa, which has been hit hard by falling commodity prices. But Russia, along with China and India, might avoid any particular pain.
The prospect of a battle against an ill-defined network of terrorism that places additional security constraints on global transportation systems and financial markets adds new uncertainties, according to Allan Meltzer, an economics professor at Pittsburgh’s Carnegie Mellon University and expert on the Great Depression.
“People don’t send salesmen or bankers to visit countries if they think they’re all going to be at risk,” he said. “You don’t want to send your personnel or build factories in places where they’re going to be blown up or attacked.”
The first victims of that attack on global confidence have been the airline industry and tourism-related firms around the world. Although the brunt of the slowdown will be felt within the U.S., the ripple effects of the terrorist attacks have spread quickly as foreign airlines have been hit by cancellations and increased insurance costs and as swanky resorts, such as those in the Caribbean, have seen their reservations plummet.
Bjorn Hanson, an analyst with Pricewaterhousecoopers, estimated that the U.S. lodging industry will suffer a 25% drop in profits in the last four months of the year and that foreign revenues will decline by at least half that much.
The toll is also being felt by international businesspeople such as Robert Brasch. Within days of the attacks, a deal he had worked on in Thailand was put on hold by the government, an East Coast insurance company canceled a meeting in Japan and a Japanese insurance firm delayed bidding on a major contract. Several multinational clients have told him that they are postponing any nonessential travel.
“I think we’re already in a global recession,” said Brasch, the president of Los Angeles-based Pacific Partners and a director of AM/PM Japan, the giant convenience store chain.
After a year of strong growth, it is the rapidity of the retrenchment that is most alarming though not unexpected because the U.S., Europe and Japan--which account for more than half the global economy--had already begun reducing their exports and capital investment to fragile economies in Latin America and Asia before the attacks.
The dollar value of exports from major emerging countries is expected to fall 2% this year, after rising 22% last year. Investment to those countries will drop to $106 billion from $167 billion last year, according to the Institute of International Finance. Battered stock prices and investor confidence will reduce investment in foreign countries by 40% to $760 billion from $1.3 trillion last year, the first decline in a decade, according to the United Nations Conference on Trade and Development.
Although no one is predicting worldwide financial collapse, given the underlying strength in the industrialized world and beefed-up foreign reserves in the struggling Asian economies, executives and government officials are braced for months of uncertainty as the U.S. and its allies gear up for a protracted war against terrorism. There are also questions about the size of any financial stimulus package in the U.S. and whether it will draw away money that would have been used to develop other parts of the world.
European officials remain hopeful that their economies will escape the worst of the global turmoil, but the recent stock market declines and slowing demand in their markets, particularly in Germany and Italy, have lessened those prospects. The Institute of International Finance expects continued weakness in Japan and Europe to hold G-7 growth to 0.8% this year, down from 3.2% last year. That would be the lowest level since 1992-93. Finance ministers of the Group of 7 nations are scheduled to meet in Washington on Oct. 6 to discuss rebuilding plans.
Particularly vulnerable right now is Japan, the world’s second-largest economy, which was already staggering under the weight of a decade-long financial crisis. Economists now say they expect the Japanese economy will contract through at least mid-2002 and possibly longer. “The timing is very, very bad,” said Atsuo Mihara, an independent analyst. “The U.S. may be looking at a recession, but Japan is looking at a near-depression.”
Analysts are particularly concerned about the first quarter of 2002. If Japanese stocks fail to rebound sharply by then--and there’s little to suggest they will--Japan could face even greater banking woes. On Tuesday, the benchmark Nikkei closed at 9,693.97, up 138.98 points for a gain of about 1.4% in the wake of Monday’s surge in U.S. stock prices.
“Unless the market recovers above 12,000, which seems remote, this creates big concerns for the financial stability in Japan,” said Masaki Kanno, an economist with J.P. Morgan Securities Asia.
A sharp contraction in private capital raises the risks that fiscally strapped countries such as Turkey, Argentina or Brazil could slide further and place new pressure on international financial agencies struggling to keep money flowing to the most needy.
That won’t be easy, because the overall collapse of confidence has clearly weakened companies already on the edge and sapped the appetite of buyers and sellers. Within days of the attack, Telefonica Moviles, a Spanish firm, backed out of a deal to purchase Brazil’s Celular CRT. The Australian government announced this week that it was postponing the sale of the Sydney Airport due to the economic turmoil.
For trade-dependent Asian economies, the biggest shock working its way through the system is the expectation that the U.S. economy will take several months longer than expected to recover.
Asian factories are bracing for a very poor Christmas season--traditionally when many companies make 50% or more of their annual profits--amid prospects that American consumers will steer clear of the mall this year. As the bad news spreads, it creates a chain reaction. Sales decline, leading to delays in company spending on new factories and machine tools, which leads to layoffs. This in turn reduces consumer confidence and spending, leading to lower sales and more layoffs.
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Magnier reported from Tokyo. Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.
