Stanley Fischer, vice-chairman of Citigroup, considers world growth prospects and finds the outlook – though not perfect – at least positive.
It is fashionable for people speaking about the global economy to be worried. I am concerned – but the truth is that the current global situation isreasonably good.
The industrialised economies provide the foundation for global growth. The US economy will probably grow at around 4% this year. The Japanese economy, while it had a bad second quarter, is coming out of its decade-long recession. Even the European economies are growing a little faster than had been expected at the beginning of the year.
The picture is better than that in the developing world. China is having trouble getting growth to come down to 8%. Other Asian economies are growing rapidly, some a little less rapidly than expected, but most of them are doing just fine, including India and Russia.
Indeed, one of the most remarkable episodes in global economic history is taking place in Asia, as over 2 billion people in India and China are seeing increases in their standard of living that have never been matched on that scale. They have been matched only in the recent past – and on a smaller scale – in Japan, Korea and Taiwan. That is the reason why global poverty is decreasing and why the global economy is expanding more rapidly than it did in most of the period since the second world war.
We are in a period of extraordinary stability in exchange rates and interest rates. Indeed, many a trader wishes that the world were a little more volatile than it has been in recent months. But not to worry, something will come along to increase volatility.
Less than expected
That is the overall picture. It sounds very good, but it is not as good in the industrialised countries as we expected, say, four months ago. The second quarter was disappointing in the US and Japan. Why? The main reason was the price of oil. The best estimate of the impact of a $10 a barrel increase in the price of oil is that it produces a decline in global growth of around half a percentage point and an increase in global inflation of around half a percentage point. We have had the $10 a barrel-plus increase in the price of oil and we are seeing a slow-down relative to expectations that is somewhere around half a percentage point.
The oil price is, however, not excessively high. It is high by the standards that we have come to accept in the 1990s. It is only half in real terms what it was in 1980. The price of oil is expected now to be in the mid $30 a barrel range, $10 above the expected long-term level a year ago. We will adapt to this higher price of oil, and it will gradually stop taking a bite out of growth as we adjust to it.
China’s impact
Next China. There has been a concern that the Chinese economy might have a hard landing. That seems not to be happening. But there will have to be a change in China’s growth strategy at some point. Japan, Korea, Taiwan, Malaysia and Thailand all grew by having exports expand at double-digit rates over long periods. Chinese exports are already sizeable, in excess of $400bn a year, and have been growing at high double-digit rates.
But China is becoming a major factor in the global economy and its exports cannot continue to increase at such high rates. That does not mean that the Chinese economy cannot continue to grow at present rates. China’s saving rate is over 40% and countries can grow perfectly well with savings rates of 30%. China can continue to grow by shifting towards domestic demand as the source of demand for its extraordinary growth engine – which may not be perfect but is, nonetheless, an extraordinary machine.
Another concern is the US twin deficits, and the damage they could wreak. The US current account deficit exceeds 5% of GDP and it cannot continue at this rate. Why? Because the arithmetic says that if the US continues to borrow more than 5% of GDP a year – and given growth projections – external debt will rise indefinitely as a percentage of GDP. That cannot happen. So something has to change.
The current account deficit has to come down to about 2%-3% of GDP. That will happen when the Asian countries, with whom the US is running a total deficit of over $300bn, decide that they do not want to buy American assets any more, and when the central banks of Asia decide they do not want to finance the American budget deficit.
John Connolly, the former US Treasury secretary under President Nixon, used to say: “The dollar is our currency and your problem.”
It’s a problem for China and Japan that their currencies will have to appreciate at some point. When that happens, current account deficits will begin to close, with a lag. Will that be disruptive?
Mildly. It will probably cause interest rates to rise in the US, and it may lead to some outflow of funds from the stock market and to a stock market slowdown during the period that the dollar is depreciating.
Currency fears
But as you think about all those threats, ask yourself, what was the value of the euro two years ago? It was $0.80. Now it is about $1.25 and it has been $1.30. The euro moved by nearly 50% within two years and that did not cause any massive disruptions.
The global economy’s capacity to deal with exchange rate changes, with the development of hedging markets and derivative markets, is much different from what it was 25 years ago. And the degree of disruption that would be caused by currency adjustment is much less than people fear or than it may have been a quarter of a century ago.
What about the US fiscal deficit? That is a long-term worry of substantial proportions. Assuming the Iowa polls are right and President Bush continues in office, the US budget deficit will be below 4% of GDP this year and will then rise to about 4% for the next 10 years. At the end of those 10 years, the US debt-to-GDP ratio will be 53% – not a number that would cause any grey hairs in Europe.
It is not desirable that our debt continues to rise; it would be much better if we had a smaller deficit. But these projections do not portray a catastrophe. The really big problems begin around 2015 when healthcare spending is expected to increase.
We don’t have a clear solution for that. But we do have a solution for social security, which can be fixed with reasonable changes in the parameters of the system. Thus the deficit presents a serious threat, but one that is mainly 10 years away.
Lower growth
Finally, we could ask about this decade. We are four years into it and we have had weak economic performance in the industrialised countries. Are we heading for a slow growth decade after the excesses of the 1990s?
Arithmetically, because global growth has been slow for the first four years of the decade, growth this decade is likely to be lower in the industrialised countries than it was in the 1990s and 1980s. But the growth rate from 2004 onwards is not likely to be lower than the average of earlier decades.
So where are we? The world is a dangerous place – there are countless risks out there. We have discussed several of them. Quite likely there are other major risks, any of which could cause the next recession. Nonetheless the global economy is doing very nicely – but not superbly – at the moment.
Stanley Fischer is vice chairman of Citigroup and was formerly first deputy managing director of the International Monetary Fund. This is a summary of remarks addressed to The Banker’s 2004 Awards dinner in London on September 7.
