Not A Happy New Year

Dec. 21, 2004
Except in Asia, most key countries will underperform 1998.

Economically, about the best the world can expect in 1999 is a repeat of 1998's 2% growth. And there's much that could make it less. The current U.S. expansion, now nearing its ninth year, is very old by post-World War II standards. The signs of recovery in Asia are cherry-blossom delicate; further Japanese financial failures and a currency devaluation in China could blow them away. The euro, the new common currency for 11 of the European Union's (EU) 15 member countries, is less than a week old -- and globally untested in foreign-exchange markets. And near yearend, a bigger-than-anticipated Y2K problem could push even the U.S. economy solidly in the direction of recession. As it looks now, however, in 1999 the U.S. economy will not fall into a classic recession: two consecutive calendar quarters of economic contraction. But there probably won't be a lot of growth either. For example, in the bellwether U.S. machine tool industry, there'll be "a bit of a downturn" in year-to-year new orders, with the decline probably becoming apparent by February, says Pat McGibbon, vice president for industry marketing services at the Assn. for Manufacturing Technology, McLean, Va. "I certainly don't see a recession, but I think that 1999 will be a year of substantial slowdown to the 2% [growth] range," states Jerry J. Jasinowski, president of the National Assn. of Manufacturers, Washington. At Scudder Kemper Investments Inc., New York, chief economist Maureen Allyn has reduced her 1999 forecast to 1.5% inflation-adjusted growth in gross domestic product (GDP) from 2.2%. "If we're wrong, both inflation and growth are likely to be lower than we've projected, not higher," she relates. Economically closer to Jasinowski than Allyn is David A. Wyss, chief economist at Standard & Poor's DRI, Lexington, Mass. He's forecasting 2.1% real growth for this year, with a second-half growth spurt offsetting weaker first (1.3%) and second (1.1%) calendar quarters. Interest-rate cuts already made by the Federal Reserve should be stimulating the economy in 1999's second six months, Wyss figures. Also in the second half, Asia isn't likely to be the drag on the U.S. economy that it has been for the past several months. "It's not so much that [Asian nations are] going to be recovering very fast; it's just that they're not going to be going down any more," Wyss says. Meanwhile, a doom and gloom U.S. outlook persists at the Jerome Levy Economics Institute of Bard College, Annandale-on-Hudson, N.Y. "We continue to expect recession. . . . The fundamentals for the global and domestic economy have not improved," claim S Jay Levy, the institute's chairman, and David A. Levy, vice chairman and director of forecasting. Officially, the EU expects 2.4% real growth among its 15 member countries and 2.6% growth among the 11 nations now beginning to deal in euros. Significantly, however, both figures are down a substantial six-tenths of a percentage point from the EU's previous forecast. Another cautionary note: Fewer than half of the 350 senior corporate finance executives of U.S.-based multinationals recently surveyed by Ernst & Young LLP, New York, anticipate an economic expansion in Europe this year -- and a startling 47% foresee no economic growth. Japan is betting that a US$167 billion stimulus package will help raise demand by 2% to 3%, result in 1% or better growth in GDP in the fiscal year that begins Apr. 1, and have the world's second-largest economy solidly in recovery in the following fiscal year. It's less than a sure bet. For example, rather than grow in 1999, Japan's economy will contract 2%, suggests the global securities research and economics group at Merrill Lynch, Pierce, Fenner & Smith Inc., New York. In percentage terms, Thailand, where the Asian financial crisis started 18 months ago, is expected to better its 1998 performance. Ditto for Indonesia, South Korea, and Malaysia. But all four countries will still post negative GDP numbers for the year, anticipates Merrill Lynch. Some 25% of Ernst & Young's survey respondents expect GDP gains in Latin America this year; a third anticipate recession; and 42% forecast no change from 1998. However, looking five years ahead, the financial executives are decidedly bullish on Latin America. Among emerging markets, they favor it over Asia by 46% to 32%.

GDP Forecast
(Annual % change ) 1999 1998
North America
U.S. 2.0 3.7
Canada 1.8 2.9
Mexico 3.0 4.9
France 2.1 2.9
Germany 1.8 2.9
United Kingdom 1.0 2.7
China 7.0 6.8
Indonesia -3.4 -13.1
Japan -1.6 -2.7
South Korea -2.0 -7.0
Malaysia -0.9 -6.2
Philippines 1.3 0.3
Singapore -1.0 1.2
Taiwan 3.5 4.0
Thailand -2.4 -9.6
South America
Argentina 2.1 4.3
Brazil -1.5 0.2
Chile 1.5 4.3
East Europe and Russia
Czech Republic 0.7 -1.0
Hungary 4.0 5.0
Poland 4.5 5.4
Russia -2.0 -4.0

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