Tuesday, April 23, 2002

Keeping the recovery going Economic recovery is underway, according to the world’s finance ministers who met in Washington over the weekend. But risks remain, not least from the oil markets "The IMF’s policymakers, at a meeting also attended by a larger group of ministers representing every region of the world, urged Europe to push ahead with reforms to 'enhance its growth potential': this is code for pushing ahead the promises the European Union has made to liberalise labour markets and increase productivity, but which it has, as yet, done little to achieve. At an EU summit in 2000, EU leaders pledged to make Europe the world’s most competitive region by 2010, but they have not had the courage or political will to force through the unpopular economic changes necessary to turn this rhetoric into reality." "IMF policymakers also once again urged Japan to reform its banking system and to push through further monetary easing to reverse the deflation that has afflicted the world’s second- largest economy for the past four years. At a press conference on April 20th, Horst Köhler, the managing director of the IMF, re-iterated his view that the Japanese economy is a worry not only for the Japanese, and other Asians, 'but also a wider concern for the global economy.'" "The IMF points to several factors to explain its forecasters more benign view of the world economy. For a start, the economic fall-out from September 11th was less than initially feared. Industrial production in those countries where it had fallen sharply is now levelling out. Several important emerging- market economies—the IMF singles out Korea— are recovering well. And there has been, so far, less contagion from Argentina’s economic and financial upheaval than was seen in previous emerging-market crises." "The other important factor on the plus side of the account is the low level of inflationary pressures, especially in the industrial economies. The IMF expects inflation in these countries to fall to 1.3% this year—the lowest level on record. In the past year or so, low inflation has certainly made it easier for central banks to cut rates, and America’s Federal Reserve has been particularly aggressive. But as the Fund points out, inflation is now so low that people have started to ask whether it’s possible for it to fall too far. When inflation is low, and interest rates are also at close to record low levels, the central banks have less freedom of manoeuvre to cut interest rates to stimulate economic activity. The Japanese experience of deflation has been salutary." "Besides oil prices, the IMF is also concerned about America’s huge current-account imbalance, as goods and capital flow into the world’s largest economy. This is bound to unwind at some point—say some economists—and when it does the adjustment is bound to be a painful one. Others respond by pointing out that this deficit has persisted for twenty years or so, with few obvious signs of harm either to America or to the rest of the world." "It seems clear from the IMF’s numbers that America remains the best hope for global growth this year and next." 4:22:29 PM  Google It!  comment  []

The houses that saved the world "Why has the American economy held up better than expected? In part because productivity growth has been much stronger than in previous downturns. However, a more important reason has been the resilience of the consumer. Last year America's corporate sector suffered its deepest recession since the 1930s, with a massive plunge in profits and capital spending. Yet, despite rising unemployment and lower share prices, consumers continued to spend. How come? One explanation lies in the surge in house prices, where the Fed's interest-rate cuts have certainly worked their magic." " . . . as falling share prices made some households feel poorer, rising house prices have made many more feel richer. Over the past year average house prices in America have risen by 9%, their fastest-ever in real terms. . . . For most people, housing is by far their largest form of wealth. Two-thirds of Americans own their homes, and gains in the value of those assets have encouraged them to keep spending." "Massive monetary easing by central banks has succeeded in propping up consumer spending around the world, partly by boosting house prices. To put it crudely: as one bubble burst, another started to inflate. Those capital gains have in turn been converted into cash as households have taken out bigger mortgages. In both America and Britain home-equity withdrawal (the increase in borrowing in excess of new investment in housing) has been running at record levels." "House prices cannot continue rising at their current pace. A sudden reversal in prices would harm the recovery, but the news on that is good: a sudden reversal is unlikely unless interest rates were to rise sharply. With little evidence of increasing inflationary pressures, rates are likely to be raised slowly. If so, prices are more likely to flatten off rather than collapse. But to maintain the current pace of growth in spending, consumers will need to pile up ever bigger debts. If mortgages remain cheap in relation to income, consumers will be tempted to maintain their borrowing. But homebuyers may be underestimating the true cost of doing so. Interest rates are low only because inflation is low; real interest costs remain quite high. Initial mortgage payments are lower, but borrowers can no longer rely on inflation to erode future payments. This burden of debt could therefore squeeze future consumer spending. That need not tip America back into recession, but it does suggest a weaker recovery over the next couple of years than many expect. Mortgage refinancing has allowed consumers to maintain their spending despite rising unemployment. But such spending has literally been borrowed from the future." "The lesson which consumers—and also many over-sanguine economists—have to learn is that spending cannot outpace income for ever. House prices have saved America and the world from a deep downturn, but they do not remove the need for consumers to take care over their balance sheets. Homes are only as sound as their foundations." 2:52:41 PM  Google It!  comment  []

Lucent Jettisons Jobs in Its Quest for Profitability "Struggling to stanch losses in an extremely difficult operating environment, Lucent Technologies said yesterday that it planned to cut 6,000 more jobs — reducing the company to less than half its peak size — and might need to take additional steps to return to profitability." 9:12:15 AM  Google It!  comment  []