HORMATS: The risk is growing, but we are not there yet. Almost every economy on the globe is slowing down. We haven’t seen this kind of sharp, synchronized downturn for many years.
You could say that. With the rapid increase in global trade and investment flows, growth in one country has a greater probability of contributing to growth in others. But the reverse is also true. When the world’s largest economy experiences a sharp drop, that inevitably drags down others.
I don’t think that’s the right way to look at it. Japan is probably in its fourth recession in the last 10 years; no amount of global coordination would have resolved its structural problems. Germany faces structural problems of long standing, including rigidities in its labor market. I am all for greater cooperation among governments, but the problems of most industrialized countries require largely domestic solutions.
America’s slowdown accounts for only part of Europe’s problems. Europe’s economy is still closely tied to the U.S. through multinational corporations, financial markets and trade. So America’s slowdown has hurt Europe. High energy and food prices, structural rigidities and a central bank less aggressive in cutting rates than the Fed are probably more significant factors. But there are positives as well. Europe did not have a red-hot high-tech investment boom and thus has avoided a U.S.-type investment bust. Fewer households in Europe own stock than in the U.S., so it has also avoided a negative wealth effect. And some countries have had the foresight to cut taxes.
It was thought that IT would prevent excessive inventory buildups. But many companies failed to slow production quickly enough as markets dried up. Some engaged in the kind of “irrational exuberance” about the strength of their markets that stock investors did. Perhaps technologies should come with a warning label: judgment not included. Technology is a powerful tool. It has been vital to the productivity boom that underpinned U.S. growth in the 1990s. But it is not a panacea.
In 1997 a financial crisis in emerging markets led to recession in those economies. But most were able to export their way out, because the U.S. and Europe were growing. Now all major economies are slowing down, as Argentina and Turkey are facing financial crisis. So yes, this situation is more dangerous for them. Even for the industrialized countries there is no locomotive. Countries cannot count on restoring growth by exporting a lot more to one another.
It is true. Greater currency flexibility and high levels of foreign-exchange reserves in many emerging economies should avert a 1997-type crisis. What we’re seeing now is slow-growth contagion: country A buying less from country B, which in turn causes B to import less from A and other nations. There is a global ricochet effect. The U.S. has slashed IT imports from Asia, which is now buying a lot less from the U.S. Exports account for a larger portion of U.S. GDP than auto and housing sales combined. So weakness in foreign markets hurts. Today the American consumer is the only thing standing between the U.S. and recession. If the U.S. falls into recession, two quarters of negative growth, there is at least a 50 percent chance of recession in a great many more countries, although not necessarily all. Then the danger of a downward spiral increases significantly.
You’d have to go back over two decades. Even in 1990, when the U.S. was last in recession, Germany and Japan were growing at 5 percent. It usually happens when there is a major shock, like the oil shocks in 1973 and 1979-80. Today there are at least three harmful factors: higher oil prices, even though they have fallen somewhat, the tech-sector collapse in the United States and a slowdown in world trade. Trade amounts to about 25 percent of global GDP–double what it was in 1970–so its slowdown affects all nations. No country is insulated from this global downturn.
