If the IMF Is Right, Watch Out Below
When it comes to making forecasts for the world economy, the International Monetary Fund (IMF) has a reputation as being a bit of a cheerleader. Because the Washington (D.C.)-based lending agency works ups its forecasts in consultations with its member nations, it tends to be overly optimistic about the outlook, punctuating the positive and overlooking the negative.
Small wonder, then, that policymakers attending the semi-annual IMF/World Bank meeting in Ottawa, Canada, Nov. 16-19 were critical of the fund for being, of all things, too gloomy. The organization has slashed its forecast for global growth next year to a meager 2.4%. That's the same rate it expects for this year and is down sharply from its pre-Sept. 11 forecast for 2002 of 3.5% (for more on the U.S. and the IMF, see BW, 11/26/01, "Commentary: Don't Use the IMF to Push U.S. Foreign Policy").
U.S. Treasury Secretary Paul H. O'Neill went so far as to bet IMF Managing Director Horst Kohler dinner that the fund's forecast of 0.7% U.S. growth next year, vs. 1.1% in 2001, would turn out to be too low. "I think when the scorekeeping is done, Horst Kohler will owe dinner, and a great big one," O'Neill declared.
"VULNERABILITIES." But O'Neill shouldn't put his wallet away just yet. It could well be that he'll end up with the tab. The world economy and global financial markets are more fragile than O'Neill and his fellow policymakers are letting on. Growth is fading everywhere, exposing financial weaknesses that were hidden during the go-go, debt-driven years of the late 1990s. "There are quite a few vulnerabilities," IMF chief economist Kenneth Rogoff says.
That doesn't mean the U.S. won't recover next year. It just means the rebound could come later and end up weaker than the vigorous V-shaped snapback many investors are expecting before the spring. Rogoff, for one, doesn't see the U.S. recovery starting until late in the second quarter, at the earliest.
His counterpart at the World Bank agrees. Says World Bank Chief Economist Nick Stern: "The growth rate will start to pick up sometime around the middle of next year...to 2% to 3% in the second half." A big improvement from recent performance, for sure, but a far cry from the 4% growth rate the U.S. enjoyed in the late '90s.
NOT ENOUGH OOMPH? This is the first time since since 1974-75 that the world's major economies -- the U.S., Japan, and Europe -- are slowing down at the same time. That means policy actions to counter the slump that seem sufficient from a domestic point of view may not measure up so well when viewed internationally. Other countries may want more.
No doubt, the U.S. has done a lot already. The Federal Reserve has cut interest rates 10 times this year, by a total 4.5 percentage points. The IMF's Rogoff reckons that the rate cuts will leave U.S. economic growth 2.5% higher than otherwise in the fourth quarter of next year.
American fiscal policy, too, has been loosened significantly -- a fact that O'Neill stressed to his fellow policymakers at the Ottawa meetings. In an indication of just how much the U.S. has opened the spigots, the federal budget is projected to be in a small deficit this fiscal year vs. a surplus of $257 billion just two years ago.
NO ROOM LEFT. The policy response from Europe and Japan has been nowhere near that aggressive, however. The European Central Bank has cut interest rates just three times this year, by 1.25 percentage points. European governments, meanwhile, have been hamstrung from overtly loosening fiscal policy by a joint agreement that limits the size of their budget deficits.
In Japan, the situation is even worse. The country looks set to experience two straight years of economic contraction -- the first time that has happened since the end of World War Two. And with interest rates close to zero and an already huge budget deficit, Japan has virtually no room to maneuver to combat the downturn.
Of particular concern: the precarious state of the Japanese banking system and the risk that fallout from the failures could spread to banks elsewhere, including in the U.S. "An aggravation of financial problems in Japan could have adverse spillover effects...among foreign financial institutions," warned Andrew Crockett, General Manager of the Bank for International Settlements, the Basel (Switzerland) club for central bankers.
OVEREXTENDED CONSUMERS. However, the Japanese banking system isn't the only sector feeling the strain from the slowdown. In the U.S., household debt service as a percentage of disposal personal income stands at 14.02%, its highest level in 14 years. Even before the economy headed into recession in the third quarter, consumers were struggling to keep up. The American Bankers Assn. says a record number of credit-card accounts were at least 30 days overdue in the second quarter, the latest period for which data are available. With companies beginning to lay off workers more aggressively, the credit pinch on consumers is sure to get worse.
Some companies are also vulnerable. "Credit losses will accelerate further as corporate balance sheets become more fragile and as a result of problems affecting certain large borrowing sectors, such as telecoms," Crockett told the IMF meeting on Nov. 17. Also likely to be hurt: the insurance industry, which took a big hit from the September 11 terrorist attacks.
In his speech at the IMF meeting, Kohler fretted that investors in the stock market may not be taking account of all the risks. "Equity markets appear to be pricing in a relatively rapid recovery," he said. "However, it remains unclear whether [they] have fully priced in the deterioration in corporate credit quality and earnings prospects that has occurred thus far."
If Kohler's fears are true, then the stock market could be heading for another setback. In that case, he may not have to buy O'Neill dinner. But given the stakes involved, he may wish he had to
Small wonder, then, that policymakers attending the semi-annual IMF/World Bank meeting in Ottawa, Canada, Nov. 16-19 were critical of the fund for being, of all things, too gloomy. The organization has slashed its forecast for global growth next year to a meager 2.4%. That's the same rate it expects for this year and is down sharply from its pre-Sept. 11 forecast for 2002 of 3.5% (for more on the U.S. and the IMF, see BW, 11/26/01, "Commentary: Don't Use the IMF to Push U.S. Foreign Policy").
U.S. Treasury Secretary Paul H. O'Neill went so far as to bet IMF Managing Director Horst Kohler dinner that the fund's forecast of 0.7% U.S. growth next year, vs. 1.1% in 2001, would turn out to be too low. "I think when the scorekeeping is done, Horst Kohler will owe dinner, and a great big one," O'Neill declared.
"VULNERABILITIES." But O'Neill shouldn't put his wallet away just yet. It could well be that he'll end up with the tab. The world economy and global financial markets are more fragile than O'Neill and his fellow policymakers are letting on. Growth is fading everywhere, exposing financial weaknesses that were hidden during the go-go, debt-driven years of the late 1990s. "There are quite a few vulnerabilities," IMF chief economist Kenneth Rogoff says.
That doesn't mean the U.S. won't recover next year. It just means the rebound could come later and end up weaker than the vigorous V-shaped snapback many investors are expecting before the spring. Rogoff, for one, doesn't see the U.S. recovery starting until late in the second quarter, at the earliest.
His counterpart at the World Bank agrees. Says World Bank Chief Economist Nick Stern: "The growth rate will start to pick up sometime around the middle of next year...to 2% to 3% in the second half." A big improvement from recent performance, for sure, but a far cry from the 4% growth rate the U.S. enjoyed in the late '90s.
NOT ENOUGH OOMPH? This is the first time since since 1974-75 that the world's major economies -- the U.S., Japan, and Europe -- are slowing down at the same time. That means policy actions to counter the slump that seem sufficient from a domestic point of view may not measure up so well when viewed internationally. Other countries may want more.
No doubt, the U.S. has done a lot already. The Federal Reserve has cut interest rates 10 times this year, by a total 4.5 percentage points. The IMF's Rogoff reckons that the rate cuts will leave U.S. economic growth 2.5% higher than otherwise in the fourth quarter of next year.
American fiscal policy, too, has been loosened significantly -- a fact that O'Neill stressed to his fellow policymakers at the Ottawa meetings. In an indication of just how much the U.S. has opened the spigots, the federal budget is projected to be in a small deficit this fiscal year vs. a surplus of $257 billion just two years ago.
NO ROOM LEFT. The policy response from Europe and Japan has been nowhere near that aggressive, however. The European Central Bank has cut interest rates just three times this year, by 1.25 percentage points. European governments, meanwhile, have been hamstrung from overtly loosening fiscal policy by a joint agreement that limits the size of their budget deficits.
In Japan, the situation is even worse. The country looks set to experience two straight years of economic contraction -- the first time that has happened since the end of World War Two. And with interest rates close to zero and an already huge budget deficit, Japan has virtually no room to maneuver to combat the downturn.
Of particular concern: the precarious state of the Japanese banking system and the risk that fallout from the failures could spread to banks elsewhere, including in the U.S. "An aggravation of financial problems in Japan could have adverse spillover effects...among foreign financial institutions," warned Andrew Crockett, General Manager of the Bank for International Settlements, the Basel (Switzerland) club for central bankers.
OVEREXTENDED CONSUMERS. However, the Japanese banking system isn't the only sector feeling the strain from the slowdown. In the U.S., household debt service as a percentage of disposal personal income stands at 14.02%, its highest level in 14 years. Even before the economy headed into recession in the third quarter, consumers were struggling to keep up. The American Bankers Assn. says a record number of credit-card accounts were at least 30 days overdue in the second quarter, the latest period for which data are available. With companies beginning to lay off workers more aggressively, the credit pinch on consumers is sure to get worse.
Some companies are also vulnerable. "Credit losses will accelerate further as corporate balance sheets become more fragile and as a result of problems affecting certain large borrowing sectors, such as telecoms," Crockett told the IMF meeting on Nov. 17. Also likely to be hurt: the insurance industry, which took a big hit from the September 11 terrorist attacks.
In his speech at the IMF meeting, Kohler fretted that investors in the stock market may not be taking account of all the risks. "Equity markets appear to be pricing in a relatively rapid recovery," he said. "However, it remains unclear whether [they] have fully priced in the deterioration in corporate credit quality and earnings prospects that has occurred thus far."
If Kohler's fears are true, then the stock market could be heading for another setback. In that case, he may not have to buy O'Neill dinner. But given the stakes involved, he may wish he had to
