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 The
Global Economic Picture - When Will Happy Days Be Here Again?
By Scott B. MacDonald and Keith W. Rabin
War in Afghanistan, recession in the U.S., default in Argentina, and more subdued Christmas parties all reflect the state we are in. Welcome to the first major downturn in the global economy in a long time. While we came close in 1997-98, the U.S. consumer and a responsive Fed came to the rescue. The global economy lost steam, but did not putter to a halt. This time around the global economy has puttered to a halt. The United States and Japan are in recession and Euroland is either going into a recession or at the very least threatening to head in that direction. We see the major trends in 2002 being the following:
- Ongoing corporate restructuring in the U.S. and Canada will continue to deal with high levels of debt.
- North American corporate restructuring will entail further personnel downsizing, non-core asset sales, and inventory reduction.
- Unemployment in the U.S. will peak in the first quarter of 2002 at 6.5%. In Japan, it will climb over 6% in 2002, possibly higher depending on the pace of structural reform and economic performance.
- The U.S. corporate bond market will be active as companies tap the debt market to take advantage of low interest rates.
- A decline in the profitability of the banking sector, combined with a rise in non-performing loans. Clearly consumer debt burdens, spending patterns and confidence levels suggest further deterioration in consumer credit as we look into 2002 and we expect that Q4 will be another "clean-up" quarter. However, we do not see the banking sector falling into a crisis along the lines of the late 1980s and early 1990s.
- The U.S. stock market is currently enjoying a bubble, which will eventually deflate again in early 2002 in the face of bad corporate earnings news in the 4th quarter. However, prospects should pick up for the second half of the year and into 2003. We think the tech sector should offer good returns after the dust settles.
- Fed policy will remain accommodative in early 2002, though we do not expect another cut in Fed Funds. Currently at 1.75%, we expect to see the Fed shift to an aggressive raising of rates through the second half of the year to contain potential inflationary pressures as the U.S. economy picks up steam.
- We expect international oil prices to be around $18-19 a barrel for 2002. Other commodities are also expected to have lower prices in the first part of 2002. This will make it difficult for some of the higher cost producers, such as Phelps Dodge in the mining sector.
We expect around 1% real GDP growth for the United States in 2001 and 0.9% in 2002. For Japan we are looking at —0.6% and —0.5% in 2001 and 2002 respectively, with Euroland looking at 1.5% and 1.2% over the same period. Germany, now in recession, will escape 2001 at 0.7% growth and expand a marginal 0.9% next year. Germany, however, continues to face a number of structural issues, including the flexibility of the work force and the fate of state-owned banks. These weigh heavily in our view on German prospects for next year.
The answer to our question of when will happy days be here again is that don’t hold your breath. While we see recovery in the second half of 2002, we expect it to be gradual. The booming 1990s were nice, but they are now history. The 2000s have yet to achieve a moniker, but so far it doesn’t look as though strong growth will come until 2003.
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Editor: Dr. Scott B. MacDonald, Sr. Consultant
Deputy Editor: Dr. Jonathan Lemco, Director and Sr. Consultant
Associate Editors: Robert Windorf, Darin Feldman
Publisher: Keith W. Rabin, President
Web Design: Michael Feldman, Sr. Consultant
Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Uwe Bott, Jonathan Lemco, Jim Johnson, Andrew Novo, Joe Moroney, Russell Smith, and Jon Hartzell
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