Too much hangs on strength of US recovery, warns UNCTAD

by Chakravarthi Raghavan

GENEVA: The world economy has belied all predictions of a deep recession in the aftermath of the events of 11 September, and thanks to the US policy of consistently focussing on limiting the impact of the slowdown on employment and real incomes, there has been a recovery.

However, with much still riding on the performance of the US economy, a more balanced global growth path appears doubtful, and a strong demand stimulus from all major industrial countries is needed for the recovery to gain impetus and for developing countries to avoid difficulties in reaching growth and development goals, says UNCTAD in its Trade and Development Report, 2002.

It was the US consumer that kept the US and world economy afloat in 2001, but that is not a basis  for launching a strong recovery in 2002, says UNCTAD, in calling for concerted actions to provide a strong demand stimulus from all major industrial countries including Europe and Japan.

The implications of the better-than-anticipated performance in the US need to be interpreted with care, says UNCTAD. It reflects firstly a largely once-for-all adjustment that cannot be expected to continue over time; secondly, household expenditures, though higher than expected, have again reduced the savings rate and increased indebtedness; and thirdly, there  has been very little evidence that business firms have completed the process of restructuring balance-sheets and adjustment to excess capacity that has kept investment expenditure low.

The recent accounting scandals suggest that these problems may have been more widespread than originally believed. And there is little evidence that the economic imbalances identified before the slowdown - such as high levels of consumer and business indebtedness, substantial over-investment in the information-technology sector, the negative impact of fall in equity prices, and difficulties of financing new business - have been eliminated. In addition, they are now joined by falling employment levels and increasing uncertainty over future incomes.

Thus, the ability of one-off factors to overcome the impediments to sustained recovery will depend on whether they are sufficiently persistent to convince producers that they need to increase investments in new productive capacity. “So far there are no signs of any such conviction.”

The US monetary policy has been very pragmatic and responsive, but not enough is known, and that is true of central bankers too, to make any judgement or to push the US Federal Reserve in any particular direction, Yilmaz Akyüz, UNCTAD’s chief macroeco- nomist and head of its division on Globalization and Development Strategies, said on 26 April at a press conference to preview TDR 2002.

There has been an employment recession in the US, in the sense of falling employment, and there has been no recession in the US economy except for a few months. The same labour force is producing more, and the view that the US economy is maintaining its productivity momentum may be quite wrong. Only growth in demand produces improvement in productivity, he added.

At the recent IMF-World Bank spring meetings in Washington, there was some cautious optimism, but also recognition of the downside risks. These have been recognized by US Federal Reserve Chairman Alan Greenspan himself. Policies in the United States and the Asian developing nations are headed in the right direction.

“However, there is concern that the United States might again start getting twin deficits - budget and current account deficits - and there could be a depreciation of the dollar - it could create problems.” And the US alone could not deal with this; it requires concerted expansionary actions by Europe and Japan, Akyüz said.

As for the effects on trade, investment and capital flows to developing countries, Akyüz said that the events in Asia would be influenced by trade and not by investments, as the countries did not rely so much on foreign capital but have current account surpluses. This was unlike Latin America, which was more vulnerable to capital flows.

Past experience showed that recessions are very bad for the trading system, which faces real tests when the world economy slows down and unemployment stops going down. That was why UNCTAD was urging expansionary actions to avoid further frictions.

The report underscores that a good deal is hanging on the strength of the US recovery. So far, says UNCTAD, the stronger-than-expected consumer spending, boosted by relatively buoyant labour market conditions and improving consumer confidence, has limited the drop in output and signalled a turnaround. However, for a strong and lasting recovery, consumer spending has to be sufficiently strong to convince producers that they need to increase investment - and there are not many signs  that producers are convinced.

Although there are concerns about a double-dip recession, a more likely outcome is that the US economy will stabilize at a low, but positive, rate of growth. But that would have only limited knock-on effects on Europe and Japan, which are still dependent on export-led upturn.

And if the dollar remains strong at the same time as growth in Europe and Japan are sluggish, the current account deficit of the US will widen even further, with the danger of heightened protectionist pressures and a further risk of a large eventual dollar devaluation that may usher in a period of more generalized currency instability. (SUNS5010)  

From TWE No. 279 (16-30 April 2002)