EconSouth (Fourth Quarter 2001)
lobal economic growth slowed significantly during the first three quarters of 2001, and economic data from early in the fourth quarter were disappointing. As a result, the outlook for the global economy was revised downward, and private forecasters’ worldwide outlook is negative for the fourth quarter of 2001 and for at least the first quarter of 2002.
Weakness persists in North America and Japan, while reports from the euro area (those European countries participating in the monetary union) indicate worse-than-anticipated performance, especially in consumer spending. Economic activity in the United Kingdom also slowed, but overall growth remained positive going into the fourth quarter of 2001.
Emerging Asian economies are weak, but there are indications that the industrial decline may be bottoming out in some areas of that region. South American activity was also disappointing, with Argentina’s recession deepening and Brazilian growth coming to a standstill. Importantly, there does not appear to be significant spillover from the current Argentine financial crisis to other emerging economies.
The shock to the global economy from the Sept. 11 terrorist attacks was clearly negative. It does appear, however, that the worst direct economic effects of the attacks were concentrated in the United States. There are some concerns that the implementation of additional security along U.S. borders may have long-term effects on the flow of goods and people from outside the United States — from Canada and Mexico in particular — but it is too early to tell how these changes will affect economic activity in the longer term.
In the global financial markets, it appears that markets have recovered from the Sept. 11 shock. But while most equity markets around the world have rebounded from their mid-September lows, few have returned to levels seen earlier in 2001.
International trade has also suffered. Trade volumes worldwide did not grow much in 2001 as demand for goods and services around the globe slowed significantly. A decline in industrial goods prices also led to a decline in the value of traded goods. In the United States, both import and export growth fell in 2001. The recession-induced import decline has led to a modest improvement in the overall U.S. trade balance, but poor demand for U.S. goods abroad, a result of decelerating activity in U.S. trade partners, has limited this improvement. (See the international trade sidebar.) Trade should pick up in 2002 as the global economy begins to recover.
The current consensus forecast for worldwide economic growth as measured by real gross domestic product (GDP) in 2002 is about 1.3 percent. This figure follows an estimated rate of global growth of approximately 1.2 percent in 2001 (see the table).
On a quarter-by-quarter basis, the global economy grew modestly in the first quarter of 2001, flattened out in the second quarter and is estimated to have entered negative territory in the third quarter of the year. While GDP should continue to decline in the beginning of 2002, the global economy should gather momentum during the year (see chart 1).
To provide perspective on the global economy, a review and outlook of economic activity for the United States’ major trading partners is useful.
U.S. economic recovery key to North American trading partners
The Canadian and Mexican economies are closely tied to the United States through trade, and the decline in U.S. economic activity has taken its toll on the economies of its NAFTA partners. Exports to the United States account for roughly one-third of Canada’s economy and one-quarter of Mexico’s.
Mexico was in recession throughout 2001, in part because of the downturn in U.S. industrial activity. Much of Mexico’s rapidly growing industrial base is geared toward supplying U.S. manufacturing industries. In addition, declining oil prices and falling global demand for energy had a negative effect on the Mexican economy as the country is a significant oil exporter.
Fortunately, the depth of Mexico’s recession has not been that great thus far, and current conditions should improve in 2002 as the global economy recovers. In addition, financial conditions in Mexico appear stable — there should be no repeat of the 1995 peso crisis that led to a very deep recession.
The Canadian economy was more resilient in 2001, posting positive growth for the first half of the year. Conditions deteriorated in the third quarter, however, and most analysts forecast a recession for Canada before it recovers in 2002.
As in Mexico, Canada’s manufacturing sector is deeply tied to the U.S. economy. Data showed a significant drop-off in shipments of and orders for Canadian manufactured goods in the third quarter of 2001, which is one reason analysts are forecasting a Canadian recession. In addition, consumer activity — surprisingly buoyant in the first half of the year — showed signs of slowing later in 2001.
Looking ahead through 2002, Canada’s recovery will depend on a rebound in the U.S. economy as well as the positive effects of looser monetary policy in that country.
Uncertainties abound for Latin America
Economic news in Latin America continues to be dominated by events in Argentina, which remains in the throes of recession and financial crisis. The recession, which began in 1999, worsened substantially in 2001, with economic growth contracting an estimated 2.3 percent.
Argentina continues to attempt to avoid further turmoil in its financial system and outright default on its debt obligations by lining up emergency financial packages led by the International Monetary Fund, swapping its short-term foreign debt for longer-term issues, renegotiating its outstanding domestic debt, partially dollarizing its economy, and instituting capital controls. Despite these steps, the country’s financial situation remains fragile. The country’s difficulties stem in part from the effects of the recession, which has significantly reduced government revenue. And without a return to growth, financial conditions may not improve. Unfortunately, the current consensus forecast predicts another year of recession for Argentina in 2002.
Significantly, the trouble in Argentina appears to have had only a very limited effect on other emerging markets in general and South American markets in particular. A number of factors have combined to limit the spread of Argentina’s difficulties, unlike what happened in the wake of the Asian and Russian crises in 1998 when emerging markets around the world were affected to some degree.
First, the Argentine situation has been unfolding for years and its condition is well known — there are no surprises like there were in Asia and Russia. In addition, the circumstances that led to the current crisis in Argentina are unique to that country. Their “peg” to the dollar (one peso equals one U.S. dollar), domestic political situation and resulting policy difficulties are not shared by other countries in the region. The fact that investors seem to be differentiating between Argentina and other emerging economies can be seen in the interest rate spread between bond yields in several emerging market areas and those in Argentina (see chart 2).
Of the countries most likely to feel some impact from Argentina’s difficulties, Brazil appears the most vulnerable. While Brazil’s trade and investment ties with Argentina are deep, they should not be significant enough to push Brazil into its own crisis. Though Brazil’s economy is currently stagnating, only part of this sluggishness is related to negative investor reaction to Argentina. The global economic downturn, however, is clearly having a sobering effect on Brazil’s economy, as did the country’s drought, which depleted hydroelectric energy supplies in the country. Near the end of the year, forecasters estimated that real GDP growth in Brazil grew at a modest 1.6 percent in 2001. The consensus forecast for 2002 economic growth is only slightly better.
The economies of the Andean nations, including Venezuela, Colombia, Ecuador, Chile, Peru and Bolivia, slowed in 2001, but outright recessions should be avoided in these countries. In most Latin American economies the quarterly growth forecast for 2002 is similar to much of the rest of the world — weakness in the first quarter of the year followed by a modest recovery after that point.
European economic slowing continues
The physical introduction of the euro, the single currency being adopted by 12 of the 15 European Union members, is likely to be the headline story going into 2002. Unfortunately, the euro is being introduced at a time of very slow economic growth over most of the continent, but the two developments are not linked. Rather, the economic slump in Europe is tied to the general global pattern of decelerating or contracting economic growth.
Growth in the euro area countries slumped in the second and third quarters of 2001, and quarterly consensus forecasts available at press time pointed to flat-to-negative results in the last quarter of 2001 and the first quarter of 2002. The slump in industrial activity is well established, and business confidence measures as reported in survey data continue to decline. This development points to further industrial contraction in the near term.
Consumers, buoyed by falling energy prices, had been supporting growth in the euro area in the face of declining industrial activity, but this trend has changed. Confidence continues to fall, and data indicate that retail sales for the major European economies have suffered.
The United Kingdom’s economy is not slowing to the extent of the euro area economies, but activity there is moderating nonetheless. Overall economic growth is estimated to have been about 1.5 percent in 2001 in the euro area and close to 2 percent in the United Kingdom. Similar results are forecast for 2002, with quarterly growth patterns following a mid-2002 recovery path.
Japan’s economy to remain stagnant
The Japanese economy entered another recession in 2001 and is forecast to remain in one during 2002. Japan’s aggregate output declined by an estimated 0.5 percent in 2001, and many analysts predict that the Japanese economy will produce similar results in 2002. All measures of current Japanese economic activity are decidedly negative as weak industrial activity and poor consumption reflect the depressed state of the economy. Both business and consumer attitudes continue to trend downward, indicating that the decline in overall economic activity should continue.
Deflation continues to be a significant threat to Japan’s economy. Efforts to curtail this trend depend largely on a significant policy response from the Bank of Japan, but monetary officials continue to wait until the government takes further steps toward structural reform, especially in the banking sector. Some movement on these fronts may be materializing as Prime Minister Koizumi has gained support in principle from parliament to dismantle several large public entities. And there are indications that regulators may be preparing to recapitalize banks that aggressively write off bad loans. Late in 2001, no concrete moves had been made, so it remains to be seen if real steps will be taken. The overall outlook for the Japanese economy depends largely on progress in these areas.
Emerging Asian economies slow
The downturn in the U.S. economy, especially in the high-tech and telecommunications industries, had a decidedly negative effect on the emerging economies of Asia. Many of these economies are highly dependent on exports of electronics, especially to the U.S. market, and the global high-tech slump is a leading factor in the recessions experienced by most emerging Asian countries in 2001.
Economic growth throughout much of this region (excluding China) was negative in the second half of 2001 and may continue to be so through the first part of 2002, according to some forecasts. The deterioration in industrial activity may be bottoming out as year-over-year declines in industrial production measures have decelerated, although these measures do remain negative. Also, exports to the United States rose for three consecutive months through September 2001, the latest month for which figures were available when EconSouth went to press. These and other developments are small but positive signs for these economies.
Chinese economic growth is slowing as well but is forecast to remain close to 7.5 percent when the final figures are in for 2001. In 2002, the Chinese economy should perform at a similar level. It is important to note that Asian financial markets have not suffered a meltdown as a result of the global recession, confirming predictions that there would be no repeat of the 1998 financial crisis. Stock markets have bounced back from the Sept. 11 shock, and bond spreads remained relatively stable in the latter part of 2001.
Moderate improvement for global economy in 2002
The global economy is going through its weakest output stretch since the early 1980s. Annual rates of growth should not change significantly in 2002 from 2001. Quarterly forecasts indicate that the global economic downturn will last at least through the spring of 2002 before returning to modest growth.
This article was researched and written by Mike Chriszt of the Atlanta Fed’s Latin America Research Group.