While there have been signs of moderate improvement in the first two quarters of 2003, a number of significant head winds will continue to challenge the global economy, according to a recent report by the Manufacturers Alliance/MAPI.
In The Global Economy at a Crossroads: Fears of Deflation; Prospects of Recovery (ER-558e), Cliff Waldman , economist and report author, writes that some positive signals mix with ongoing concerns for the world's economy in the next 18 months.
"The end of the Iraq war, combined with hopeful signs in the U.S. economy, economic stability in Latin America, and a more aggressive monetary policy in the Eurozone are all positive signs for a struggling global economy," he says. "But, while the most likely scenario is for modest global growth in 2003, followed by stronger growth in 2004, there are still head winds which are generating a degree of downside risk to a positive near-term outlook."
Among the more optimistic factors for a U.S. recovery are the modest orderly decline in the U.S. dollar since February 2002, the significant fall in long-term bond yield rates since 2000, and the declining spreads in the corporate treasury market since October 2002, all of which facilitate an accommodative monetary policy to produce improved economic growth in the second half of 2003 and into 2004.
In addition, a well-timed tax cut will help continue to drive consumer spending, and a nominal recovery in corporate profits is now underway. Waldman argues that if the profits recovery accelerates and becomes more evenly distributed between cost-cutting and revenue growth, it will eventually lead to stepped-up business demand and hiring.
Roadblocks to a strong economic pickup in the U.S. include an elusive business investment recovery to date, skyrocketing natural gas prices, an increase in oil prices since the immediate aftermath of the Iraq conflict, deflation in goods prices, and a weak labor market.
Prospects for the global economy also remain murky. After an abysmal economic performance in 2001 and 2002, Latin America has begun to show signs of life. Argentina is clearly recovering, and the region as a whole appears poised for moderate growth in 2003 and 2004.
The same may not hold true for Europe and Japan, although the recent 50 basis point ease by the European Central Bank is certainly a plus for the languishing Eurozone economy, particularly as it faces the challenges of an appreciating euro. But the structural weakness of the German economy, which accounts for about 35 percent of total Eurozone output, and continued weak German data suggest that Europe will make little, if any, contribution to global output in the next year or two.
Recent data on the long-suffering, deflationary Japanese economy only serve to reinforce near-term pessimism regarding the prospects for the world's second largest economy. China, however, is expected to maintain its momentum with GDP growth of 7.0 percent or better in 2003 and 2004.
"While Japan languishes in deflation, the signs around the world are as yet too faint to generate a concern about a global deflationary spiral," Waldman says.
Source: MAPI
