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The Gathering Gloom Greenspan's Balancing Act
Philippine-Based MNCs See Improved Economy Under Gma: Survey Don’t cry for me…
   
   

 

The Gathering Gloom
Aug 16th 2001
From The Economist Global Agenda

There have been further signs of economic slowdown this week. The Bank of Japan has reacted by easing monetary policy, in a desperate bid to stave off recession. The German economy is also now in serious trouble, while a new report from the IMF on August 14th confirmed that the prospects for America look uncertain at best


“WE CANNOT help but think that downside risks to the economy are becoming a reality.” That was the explanation offered by Masaru Hayami, the elderly and often stubborn governor of the Bank of Japan, for the bank’s decision to loosen monetary policy still further at the end of its two-day meeting on August 14th.

Mr Hayami and his colleagues have been under increasing pressure to respond to Japan’s economic stagnation; the deepening gloom about the rest of the world economy seems finally to have persuaded them to act. In its monthly report, published on August 15th, the Bank of Japan hinted strongly that recession now looked likely. Gloomy sentiment about Japan's prospects was little changed even after the government issued revised figures for first quarter GDP growth on August 16th, showing a slight rise (0.1%) against the decline previously estimated.

The bank's latest move may not be of much practical help, as Mr Hayami more or less admitted at a news conference after the announcement. In a country where prices are falling (after having done so in both 1999 and 2000) the scope for effective monetary-policy action is limited. The latest initiative consists mainly of providing a boost for commercial-bank reserves, which should enable the banks to lend more. But since the demand for new loans is weaker than the supply, the main effect could be to cushion the pain of banking reforms intended to grapple with the bad-debt problems that have long plagued the Japanese financial sector.

Japan’s economy is now in such a mess that no quick fixes are in available. The Executive Board of the International Monetary Fund (IMF), in a report published on August 10th, welcomed the economic reforms planned by Junichiro Koizumi, the prime minister who won office unexpectedly four months ago. But the report noted that economic restructuring could, in the short-term, have an adverse impact on output and unemployment and it warned that if the Japanese government
needed to take short-term measures to alleviate hardship it should avoid resorting to “low-quality” public works programmes—a traditional, but largely ineffective approach which successive governments have favoured.

The IMF is concerned that Japan may be in a vicious downward spiral of slowing economic activity,rising corporate bankruptcies and a deteriorating banking system—all of which could, in turn, combine to worsen the global outlook. Such is the scale of Japan’s problems that some economists advocate a large-scale monetary reflation of the kind undertaken by America during the 1930s.

But even as Japan may be contributing to the world economic gloom, it is now also sufffering its effects, as Mr Hayami acknowledged. Figures released on August 13th show that in the first half of this year, Japan’s trade surplus fell by more than 36% compared with the same period a year ago. Exports fell for the third consecutive month in June, while imports have now risen for 20 months in a row. Part of this is the deteriorating performance of high-tech companies as they cope with falling American demand.

Europe, too

Japan’s problems are deep-seated and long-running. Europe, by contrast, has experienced an alarmingly rapid change in its economic fortunes. At the beginning of this year, the euro area seemed to be the one bright spot in the industrial world, expecting growth this year marginally above its long-term trend rate. The slightly complacent tones of European politicians have vanished, though, as the outlook has deteriorated. Germany, in particular, may now be in recession, according to some economists.

Some of the sharp slowdown in Germany is the result of the even more rapid deceleration in the United States—Germany is a big exporter to the US, and German companies have invested heavily there. But German domestic demand has also been persistently weak. Although retail sales figures

The ECB is concerned about the inflationary outlook in the euro area; even German inflation remains uncomfortably high. But it is also trying to take account of the monetary policy needs of the area as a whole. Lower interest rates clearly did not suit all the euro countries. And yet there are signs that the bank’s attitude may be changing, as the impact of Germany’s and the world’s economic troubles spread. France’s economic performance has begun to lose some of its shine. And Ireland, Europe’s fastest-growing economy, is beginning to recognise that its dependence on foreign investment, much of it in the high-tech sector, could be a mixed blessing in the wake of the worldwide high-tech slump. Gateway, an American personal-computer manufacturer,last week announced plans to close its Irish plant.

America holds the key

Ultimately what happens in America will have a critical impact on the extent of the slowdown in Asia and Europe. The speed and scale of the downturn in the United States has already had a substantive and psychological impact on the economic outlook of nearly every industrial economy, though some are affected to a greater degree than others. And no other economy seems big or reselient enough at the moment to act as an engine of global growth. A pick-up in America would raise cheers everywhere.

But so far there is no real sign of of a US turnaround, despite the Fed’s aggressive cutting of interest rates. For every bit of good news, there has been a portion of bad. Productivity figuresturned out better than expected on August 7th; and the next day, the Fed published the results of its latest monthly survey of economic activity, which suggested the outlook remained grim. Retailsales figures for July, issued on August 14th, were marginally better than expected, but only because they did not fall in nominal terms. It was the same story with manufacturing output figures released on August 15th: flat, and therefore slightly ahead of expectations. On August 14th, a new report from the IMF confirmed that the outlook remained uncertain.

The current betting is that the Fed will cut interest rates yet again when it meets on August 21st. That might encourage those who hope the worst is over. But until some unequivocally good news comes along, there will be no end to the uncertainty for Americans—or for anyone else.

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Philippine-Based MNCs See Improved Economy Under Gma: Survey

Thursday 26 July 11:51 PM

MANILA, July 26 Asia Pulse - The chief executive officers [CEOs] of multinational companies [MNCs] based in the Philippines believe that the economy would undergo slow but steady improvement under Gloria Macapagal-Arroyo's presidency.

This finding is highlighted in a quarterly survey for the period ending June, 2001, of 62 top multinational executives by the Economist Intelligence Unit [EIU] Philippines, a reputable economic research firm.

According to the EIU survey, 70.4 per cent of the executives, when asked to give a forecast on the Philippine economy, responded they expected "slow/steady improvement."

The survey also showed that 7.4 per cent of the CEOs thought that there would be a "major change for the better" in the economy under the Macapagal-Arroyo administration.

The forecast of 13 per cent of the surveyed expatriates was that the economy would muddle through.

The 62 CEOs, who took part in the EIU survey last June, gave the Macapagal-Arroyo administration high positive net satisfaction ratings on the handling of the Labor Day assault on Malacanan Palace by supporters of disgraced President Joseph Estrada (85.1 per cent), on the President,s choices of Cabinet members (77.8 per cent), and on management of the budget deficit (18.5 per cent).

However, negative net satisfaction ratings were posted on peace and order (-35.2 per cent), reduction of fiscal incentives (-16.7 per cent), and the conduct of the May 14 elections (-3.7 per cent).

A previous EIU survey for the first quarter of 2001 ending March showed that the multinational CEOs ranked the Philippines No. 2 as priority country for investment in Asia.

The first five priority countries for investment, as rated in the EIU survey by the CEOs of multinationals operating in the country, are: People,s Republic of China, Philippines, Malaysia, Thailand and Australia.

Bringing up the rear of the list of priority countries for investment, in chronological order, are: Taiwan, Singapore, India, Indonesia, South Korea, Japan and Hong Kong.

(PNA)

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Philippine-Based MNCs See Improved Economy Under Gma: Survey

Thursday 26 July 11:51 PM

MANILA, July 26 Asia Pulse - The chief executive officers [CEOs] of multinational companies [MNCs] based in the Philippines believe that the economy would undergo slow but steady improvement under Gloria Macapagal-Arroyo's presidency.

This finding is highlighted in a quarterly survey for the period ending June, 2001, of 62 top multinational executives by the Economist Intelligence Unit [EIU] Philippines, a reputable economic research firm.

According to the EIU survey, 70.4 per cent of the executives, when asked to give a forecast on the Philippine economy, responded they expected "slow/steady improvement."

The survey also showed that 7.4 per cent of the CEOs thought that there would be a "major change for the better" in the economy under the Macapagal-Arroyo administration.

The forecast of 13 per cent of the surveyed expatriates was that the economy would muddle through.

The 62 CEOs, who took part in the EIU survey last June, gave the Macapagal-Arroyo administration high positive net satisfaction ratings on the handling of the Labor Day assault on Malacanan Palace by supporters of disgraced President Joseph Estrada (85.1 per cent), on the President,s choices of Cabinet members (77.8 per cent), and on management of the budget deficit (18.5 per cent).

However, negative net satisfaction ratings were posted on peace and order (-35.2 per cent), reduction of fiscal incentives (-16.7 per cent), and the conduct of the May 14 elections (-3.7 per cent).

A previous EIU survey for the first quarter of 2001 ending March showed that the multinational CEOs ranked the Philippines No. 2 as priority country for investment in Asia.

The first five priority countries for investment, as rated in the EIU survey by the CEOs of multinationals operating in the country, are: People,s Republic of China, Philippines, Malaysia, Thailand and Australia.

Bringing up the rear of the list of priority countries for investment, in chronological order, are: Taiwan, Singapore, India, Indonesia, South Korea, Japan and Hong Kong.

(PNA)

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Greenspan's balancing act
Jul 18th 2001
From The Economist Global Agenda

Alan Greenspan displayed cautious optimism about America’s economic future in testimony to Congress on July 18th. While the chairman of the Federal Reserve did not rule out further interest-rate cuts he did make it clear that it was not possible to eliminate the business cycle

ECONOMIC forecasts do not have an enviable record. In delivering this verdict to the Committee on Financial Services to America’s House of Representatives, Alan Greenspan was making it clear that he would offer no hostages to fortune. The powerful chairman of the Federal Reserve—America’s central bank—was on Capitol Hill to present his monetary-policy report to Congress, something he is obliged by law to do twice-yearly. He was relatively sanguine about America’s economic prospects—no mention of the R-word from him—but Mr Greenspan is too cautious and too experienced to rule out further interest-rate cuts. He did, however, rule out the notion that he—or anyone—could eliminate the business cycle.

Ultimately, Mr Greenspan gave little away, but his opacity should not, on this occasion at least, be mistaken for evasiveness. It is the Fed’s responsibility, as he reminded his audience, to promote maximum sustainable economic growth; but that is precisely why he and his colleagues need to be vigilant against inflation. Low inflation is a prerequisite for the economic expansion everyone wants.

It is now clear that the Fed is close to the limit of its scope for interest-rate cuts. It may even have reached it. But, as Mr Greenspan acknowledged, no one can yet be sure whether a further cut will be needed, in order to boost the recovery Mr Greenspan and his colleagues expect towards the end of the year. Nor, though, can anyone be sure whether, needed or not, another cut would undermine the fight against inflation.

Some reports suggest that the Fed’s main policymaking body, the Federal Open Market Committee (FOMC), is more concerned about the inflationary impact of further cuts than it was at the beginning of the year. Judging from his testimony, Mr Greenspan is well aware of the dilemma the Fed will face if economic recovery is slow to appear. In fact, Mr Greenspan’s discussion of the economic outlook suggests that the policymaking dilemma for the Fed is perhaps more acute now than it was at the end of the year.

The Fed’s report to Congress recalls the speed at which the economy slowed towards the end of last year. Most people had been expecting some sort of slowdown, following what Mr Greenspan called an extraordinary period of buoyant expansion. Few people had anticipated that the slowdown would be as sharp as it was. Mr Greenspan ascribed this to businesses’ reacting more quickly to the faster information flows they now have access to, coupled with the rise in energy costs, which dented household and business spending.

The Fed decided in early January that it needed to respond aggressively to this slowdown, and interest rates have now been cut six times, by a total of 2.75 percentage points. Interest-rate reductions operate after a lag, though, and Mr Greenspan pointed out that the cuts already made now amount to a sizeable monetary stimulus. Lower energy costs and the tax-cut cheques now being mailed to American homes will also boost household purchasing power. Consumer spending has held up well so far, but Mr Greenspan noted that a weaker jobs market, the impact of falling equity values and any easing of house prices could all risk dampening the American love of shopping.

Business investment will ultimately depend to a great extent on the level of consumer demand. While firms have been much quicker to spot and react to falling sales, Mr Greenspan argued that technological and managerial innovation has not yet helped firms predict demand more accurately. Inventories piled up in many industries late last year—only moderately in historical terms, perhaps, but Mr Greenspan pointed out that the ratio of inventories to sales has been falling for a decade, as technological advances have reduced the need to hold stocks. Car companies were quick to rebalance their stocks, but the high-tech sector has moved more slowly to bring things under control.

Mr Greenspan’s stance now seems to be one of watching and waiting. The uncertainties are considerable, he said, and the economic risks remain tilted towards weakness. So if conditions warrant, further cuts might be needed—provided the control of inflation is not put at risk.

When the economy looked as if it might go into freefall at the beginning of the year, the Fed’s course of action was clear: Mr Greenspan and his colleagues cut swiftly, and often. Now, though, the signals are mixed. The cuts made need some time to work through, and it is no longer quite so clear that inflationary pressures are as contained as they were (figures published on July 18th showed that consumer prices rose in June by a little more than expected). Mr Greenspan does not want to be blamed for making the downturn worse than it need be (by hesitating about further cuts); but he is also conscious of the historical tendency of central banks, including the Fed, to overshoot on the way down as much as on the way up.

Mr Greenspan also took the opportunity in his testimony to disabuse anyone who still thought the business cycle had been eliminated. In the heady days of America’s seemingly endless expansion, there were those who thought the Fed chairman’s stewardship of the economy had put paid to boom and bust once and for all. Not so, said Mr Greenspan on Capitol Hill—for the simple reason that there is no tool to change human nature.

The problem is people—too many are prone to the bouts of optimism and pessimism that can be seen in the build-up or ending of speculative excesses. The authorities can do no more than respond to the consequences on the way up and on the way down. Mr Greenspan’s hard-headed realism might strike a chord in some other central banks and finance ministries.

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Don’t cry for me…

Jul 13th 2001

From THE ECONOMIST Global Agenda

The Argentine government is putting a brave face on its latest economic difficulties. But the penal rates it has been forced to pay on its public debt this week reflect investors’ fears that a debt default, or a devaluation, is imminent. Market nervousness is spreading

DON’T panic was the message from Argentina’s president, Fernando de la Rua, this week. Fears of a debt default were, he said: “a momentary problem”. There’s optimism for you. Now in the third year of recession, his country’s economy has stubbornly resisted all efforts to revive it.

In spite of Mr de la Rua’s words, the world’s financial markets are now very nervous about the country’s financial prospects. The government was forced to pay interest rates of 14% at an auction of three-month Treasury bills this week, up from 9% last month, and investors have no appetite for longer-term bonds. On July 12th, Standard & Poor's, a credit-rating agency, cut Argentina's long-term sovereign credit rating. In spite of Mr de la Rua’s insouciance, the government has embarked on another round of public-spending cuts which are bound to be difficult to sell politically.

Emerging-market worries are spreading. Once investors smell trouble in one country they start to get edgy about its neighbours—and in these cases the definition of neighbour can be pretty wide. The Brazilian real has fallen further against the dollar this week, as have the Chilean and Mexican currencies. And Latin America’s difficulties are already having painful repercussions beyond its borders. Eight of the ten top Spanish companies have large investments in Latin America, and the Madrid bourse fell to its lowest level in three years. Asian markets, already unnerved by the prolonged downturn in Japan and then, this week, the prospect of recession in Singapore, are now growing anxious about the risk of a full-scale emerging-market crisis la 1997-98. Turkey, never one to be left out, caused market jitters when the IMF delayed a loan instalment until the Turkish government delivered on its promises. The IMF Board released the funds on July 12th, but placed the blame for the delay firmly on the Turkish government because of what it said were “ambiguities regarding the implementation of certain measures”.

Contagion is always a risk when crises erupt, especially when it involves a country like Argentina, which alone accounts for about a quarter of all traded emerging-market debt—and whose outstanding debt, in turn, is equal to about half of total GDP. Investors can be tempted to join the flight to quality, without taking the time to assess the relative risk of different countries’ debt. In its annual International Capital Markets report, published on July 12th, the IMF noted that developments in Argentina and Turkey would play a key role in the availability of capital for many emerging markets.

But just as many of East Asia’s current economic difficulties can be said to be home grown, in the sense that they remain unduly reliant on one sector—high-tech manufacturing, which is now in the throes of a worldwide slowdown—so domestic upsets are at the root of some of Latin America’s troubles.

This is particularly true of Argentina: only just over 11% of its exports go to the United States, compared with 83% of Mexican exports (and around 20% for Brazil and Chile). Argentina is also much more reliant than some of its neighbours on intra-regional trade. And that’s why the Argentine government’s policy of pegging the peso to the dollar is proving so painful.

In recent months, the dollar has defied expectations and soared. In spite of the American downturn, it is now about 10% higher against the yen and the euro than it was at the beginning of the year. On July 9th, Sir Edward George, governor of the Bank of England and president of the G10 group of central banks, said the high dollar was having perverse effects on the American economy. It is certainly harming American competitiveness. But its high value is probably doing more harm to Argentina, for whom exports are more important and whose export prices are increasingly uncompetitive as the Argentine peso rises in line with the dollar.

Trade links and pegs

Ellen Meade, an economist at the Centre for Economic Performance in London, says that a good candidate for a fixed-peg exchange-rate link needs to have a very high trade share with the country to which it is pegged. She concludes that Argentina’s trade links with America may not have been large enough to make its currency board (or peg by another name) viable in the case of a prolonged appreciation of the dollar.

A growing number of economists believe devaluation and debt default are now inevitable

After three years of recession, Argentina’s unemployment rate is now 14.7%. None of this is doing much for the popularity of a government which finds itself caught in a trap: there seems little prospect of stimulating the economy without lower interest rates, but the country’s creditors will not accept lower interest rates while the economy is in the doldrums and there is an increasing risk of default or devaluation.

Suspicions about devaluation grew last month after the finance minister, Domingo Cavallo, introduced a subsidy for exports and a tax on imports—a wheeze interpreted by some as devaluation by the back door. A growing number of economists believe devaluation and debt default are now inevitable: the question is no longer whether, but when. As the crisis worsened in recent days, both the IMF and the American government appeared studiously to avoid offering further help to Buenos Aires.

No other country in the region faces quite the same problems as Argentina, and some of the pressure on the currencies of Brazil, Chile and Mexico in recent days is a reflection of investors’ nervousness. Indeed, Brazil is not without its own dollar problems: much of the country’s public debt is pegged either to interest rates or the American dollar. The rise in both has thus increased its debt burden, and the weakness of its currency could make Brazil’s inflation target harder to meet. The government has said it is prepared to spend around $6 billion this year to support the real against the dollar—such intervention, though, tends to be a sure way of losing money.

Brazil is clearly facing a difficult period, as foreign-capital flows to Latin America dry up (except, so far, to Mexico) in the wake of the global slowdown. But in comparison with Argentina, Brazil’s problems still look manageable. That could change, however, with a financial meltdown in Argentina. The region could not escape unharmed by such a crisis; and worldwide contagion would then become a real risk.

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