The Global Economy: Out like a Lion, in like a Lion
M. Kemme, Dr. David, Business Perspectives
The United States economy roared in the last half of 1999, with third quarter Gross Domestic Product (GDP) growth revised upward by the Department of Commerce to a stunning 5.5 percent annual rate. Fourth quarter growth will likely end at close to 5.0 percent as well, pulling the rest of the world along as we import everything in sight. Although Alan Greenspan is trying to take away the punch bowl in the middle of the party, he's likely right this time. Europe continues to grow, and Asia is recovering rapidly. Only in Latin America do we see continuing signs of weakness. As a result, commodity prices, notably oil, are beginning to rise. Next year there will be solid growth at home and abroad; but without continued Fed dampening, we will start feeling inflationary pressures. There is little slack in the world economy to provide room for policy makers to maneuver in the year 2000.
The financial crisis in Asia of 1997-1998 is ancient history. Indonesia, Malaysia, South Korea, Taiwan, and Thailand have come back with GDP growth for the year expected to be close to 1.0 percent for Indonesia, over 4.0 percent for Malaysia, nearly 10.0 percent for South Korea, 6.5 percent for Taiwan, and nearly 4.0 percent for Thailand. The recovery is solid with industrial output leading the way, with double-digit growth approaching 20.0 percent for Malaysia and South Korea. Inflation remains modest at 2.0 percent or less everywhere but the Philippines, which will finish the year with inflation of just over 5.0 percent. Hong Kong and Singapore, relatively immune from the financial contagion of the region, continued to grow at about a 1.0 percent rate, with very low inflation. For the year 2000, strong growth is expected in every country as financial restructuring continues and domestic demand recovers. China, which needs about 7.0 percent growth to absorb new entrants into the labor force, has maintained t hat level of growth, and India will finish the year with growth at just over 5.0 percent. In Japan, the government continues to prime the pump, with the fiscal deficit expected to be a huge 6.0 percent of GDP for 1999. With prices still falling and interest rates as low as they can go (overnight rates at .03 percent--that's right, three hundredths of a percent), Masaru Hiyami, the head of the Bank of Japan, has nowhere to go. But, fortunately, there is light at the end of the tunnel. With abundant money and massive government stimulus, the question is not whether or not the economy will expand, but when and by how much. Slowing things down are Japanese consumers, who still prefer to save as retail sales remain in the doldrums and both producer and consumer prices are still falling. Unemployment will close the year at about 4.5 percent, while GDP growth is showing the first upward signs with growth expected to be about 1.0 percent for 1999. Further recovery is expected in 2000, with GDP growth forecast to be 2 .0 percent or better. Increased demand for Japanese industrial production may lead to an even stronger recovery.
It would have paid to invest in stocks in these countries in 1998 as the worst of the group were Taiwan and Thailand, where the stock markets increased in dollar terms by 11.6 percent and 17.1 percent, respectively, from the end of 1998 to mid-November 1999. In Indonesia, Malaysia, and South Korea, stock markets roared back as stocks increased 83.6 percent, 24.3 percent, and 70.2 percent. Hong Kong and Singapore took a smaller hit during the financial crisis, but stocks still surged 50.0 percent and 51.3 percent in dollar terms for the same period. Chinese and Indian stock markets also advanced 26.3 percent and 48.2 percent as well. In Japan, the Nikkei grew 40.0 percent, outpacing the stock market gains of every other developed industrial economy and reflecting the growing optimism of recovery in Japan.
In Europe, the excitement of the Euro has focused attention on the new European Central Bank, led by Dutch Wim Duisenberg, as it prepares to set monetary policy for all of Europe. …