----- Original Message ----- From: Mark Jones <[EMAIL PROTECTED]> To: crl <[EMAIL PROTECTED]> Sent: Tuesday, January 02, 2001 9:17 AM Subject: [CrashList] FT Editorial comment: World economy in 2001 Published: January 1 2001 18:23GMT | Last Updated: January 1 2001 18:30GMT Students of US economic history have long been aware of the parallels between the 1920s and the 1990s: in both decades perpetual prosperity seemed guaranteed and in both, stock markets attained extraordinary peaks. Everybody knows what happened after 1929. What will happen this time? As 2000 came to its end, the most fatuous optimism had vanished. Few argue that boring old ways of valuing companies can be dispensed with. Similarly, few argue that the business cycle is dead. Yet, until quite recently, optimism remained the rule. In what may prove some of its most embarrassing forecasts, the Organisation for Economic Co-operation and Development predicted the softest of possible landings. In its December Economic Outlook, the US economy slows from 5.2 per cent growth in 2000, to 3.5 per cent in 2001; the euro-zone grows by 3.1 per cent, after 3.5 per cent last year; and even Japan expands by 2.3 per cent, up from 1.9 per cent in 2000. Such forecasts look grievously out of date. In the US, there is evidence of a rapid weakening: claims for unemployment insurance are markedly up; consumer confidence has tumbled; capital goods orders are falling; and stock markets are down. Goldman Sachs has reduced its forecast of growth in 2001 to 2.5 per cent, a huge fall from the 4 per cent predicted three months ago. Deficit rise In 2000, the US private sector financial deficit rose to an unprecedented level of 7 per cent of gross domestic product. This was financed by a government surplus of 2.5 per cent of GDP and a current account deficit of 4.5 per cent of GDP. If confidence in the miracle tumbled, the US private sector could quickly change its behaviour. Alan Greenspan's Federal Reserve would have to act decisively to avert a deep recession. While this should reduce the impact on the US, it would be partly because a fall in the dollar shifted pain elsewhere. Where would this leave the rest of the world? In difficulties, is the answer. Fortunately, there would be important offsets. Among them would be a weakening in the price of oil, which has already tumbled from a peak of over $35 a barrel to less than $24, and a decline in general inflationary pressure. This combination should make it far easier for central banks to act aggressively. Test of maturity The willingness of the European Central Bank to do so would be a test of its maturity. If it did act, the euro-zone - which exports less than 2 per cent of its aggregate GDP to the US - should be only modestly damaged. Growth at over 2 per cent is achievable even if the US goes into a recession. The same should be true for the UK. Manufacturers would breathe a sigh of relief if the pound fell further against the euro, while strengthening modestly against the dollar. Relief would also be felt in countries with currencies tied very closely to the dollar, such as Argentina. Those very heavily dependent on the US market - such as Mexico, Canada and the export-oriented economies of east Asia - would be harder hit. Also hard hit would be those with unresolved internal problems. Among the latter are Indonesia, Thailand and even South Korea. But Japan is the most worrying - because of its size. The decision by the Bank of Japan to end the zero-interest policy in the summer looks increasingly mistaken. An economy in the grip of general deflation needed looser, not tighter monetary policy. 2001 will be a year of living interestingly. It may prove to be a year of living dangerously. The robustness of the US new economy and the brilliance of Alan Greenspan will be severely tested, as will the vigour of economies and wisdom of policymakers elsewhere. "Hope for the best; prepare for the worst." This is the right motto for what purists call the first year of the third millennium. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
