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Leading the world out of its downswing

DR Shane Oliver from AMP Henderson’s has looked at the state of the world at large. His initial feeling is that the global economy is experiencing its first synchronised downswing since 1982.

However, he does say that a global recession will be avoided. His reasoning herein is that there are already tentative signs the US economy is close to the low point in its cycle, and that it should show some signs of improvement before the end of the year.

What has surprised Dr Oliver is the speed at which the downturn has taken off in the European and Japanese regions. The big question as far as Dr Oliver is concerned is how far those two regions lag behind the US.

The good news for the global economy is that the OECD’s leading indicator series for OECD Industrial Production appears to have formed a fairly convincing bottom. This would then suggest that global growth would be troughing in the current quarter. When you break down the individual country components of the OECD leading indicator series it shows that, of the three major regions, the US is leading the way in terms of a recovery, whereas leading indicators for Europe and Japan are still deteriorating.

There is a range of leading indicators for the US economy that have started to turn around. The US economy is already benefiting from the massive interest rate cuts that have been wrought by Dr Alan Greenspan. Combine this with lower energy costs and the huge tax cuts that President Bush has implemented and this should give the US economy a further boost during the current half year.

The Federal Reserve, in its latest Beige book, suggests the current conditions in the US are pretty weak. However, the leading indicators suggest that US industry should begin to recover during the fourth quarter this year.

The recovery is expected to be a somewhat muted affair. The main reason for this is the strength that we have seen in the US dollar. For the past two or three years the US dollar has had an inexorable rise to its current levels. While all of us have wanted to see a strong dollar for our currency, the downside of a strong currency is a weak export position.

The cost of goods from the US is now at a prohibitive level for most other nations. This will add to the deficit position of the US current account. Combine this with a substantial budget deficit and we are starting to see the need for the US to have a currency that is less strong.

Japan’s position is an interesting one. Just when you thought it was not possible for that economy to get any worse, the OECD’s Leading Indicator for Japan is still deteriorating. The indicator suggests that industrial output in Japan is likely to decline for the rest of this year. This, of course, will feed through to the rest of the economy and consumers who have been propping up that economy are likely to be dragged down as well.

Prime Minister Koizumi has indicated that he is going to be somewhat reformist. Unfortunately, these policies are likely to make things worse before they get better. It is hoped that the Bank of Japan will be willing and able to offset deflationary pressures by easing monetary policy. Already it has interest rates set at zero. The next 18 months are going to be a period of muddling through for Japan. Next year may provide it with a significant boost from a global pick up in growth.

Europe seems to have similar characteristics to the US economy, with a six-month lag. Business confidence is down and output is expected to continue to slow over the next couple of quarters, followed by a mild recovery in early 2002. Dr Oliver expects that the recovery in 2002 in Europe will be sluggish at best. This is attributed to the reluctance of the European Central Bank (ECB) to cut rates quickly. But if the output continues to decline as is predicted by the OECD leading indicator, then the ECB will need to cut rates far more aggressively and quickly to sustain a recovery in 2002.

When you look around the world, it is noteworthy that the US, UK, Canada and Australia have been the most aggressive in terms of cutting rates this year. As a result, those economies are showing the most promise in terms of the leading indicators from the OECD.

In the Asia-Pacific region, outside of China there will be some hard-hit economies by the economic slowdown in 2001. Some economies in the region are particularly exposed to the technology cycle, for example Taiwan and Singapore. The leading indicators for Korea and Thailand are already showing signs of troughing. China, on the other hand is still providing substantial growth, with a GDP growth rate of around 7.5 per cent expected in 2001 and 2002.

So where does Dr Oliver expect the growth to come from in the next 12 months? The table (above left) shows AMP Henderson’s projected growth rates for 2001 and 2002 as well as the growth rate for 2000. How does all of this effect Australia?

Naturally, the deterioration of the Japanese situation is the most difficult aspect for us. Japan remains one of our major trading partners. However, despite this being the case it, must be remembered that, during the past 10 years, Japan has been in and out of recession four times. Australia has had its best decade of growth over the same period.

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