Philippine Business Magazine: Volume 9 No. 2 - Forecast
Follow the Leader
Terrorism and the Middle East conflict may disrupt bright prospects for global recovery.
By Michael B. Mundo

The US recovery, which is now underway, will benefit Asian exports and economies this year. This sums up the presentation of Deutsche Bank’s Dr. Hubert Neiss and Bloomberg’s Lee Miller at the Philippine Business Outlook ’02 held last March 1 at the Manila Peninsula Hotel.

Big drivers of world economy
According to Dr. Neiss, Chairman for Asia of Deutsche Bank AG, the world economy is poised for a cyclical upswing after more than a year of slow growth. He notes, however, greater uncertainty and risks after the terrorist attacks on the US. He reviewed prospects for the three major economies in the world. He believes the “US economy will recover, the EU will also accelerate, while no positive contribution to world growth will come from Japan.”

Recovery pace
There is a consensus for recovery in the United States. There are disagreements, however, on the speed of the upturn. The optimists believe in a “V” shaped recovery fuelled by the Fed’s monetary easing, expansionary fiscal policy and low oil prices. Those who expect an “L” shaped recovery expect corrections from imbalances created by the long investment boom in the nineties. The pessimists, representing the minority view, however, predict a “double dip” recession with rising unemployment and low profits. Deutsche Bank forecasts a 2% modest growth in the US.
Not immune to the slowdown in the US is Europe. With weak growth, it was constrained to expand fiscal policy or ease monetary policy to guarantee financial and price stability. Deutsche Bank believes that GDP increase will be “quite small.”

Confidence crisis
Turning to Asia’s major economy, Japan is expected to remain in recession. Expansionary monetary and fiscal policies will have limited impact due to low confidence. And that confidence will only be restored by resolving difficulties in the banking system and the corporate sector “in a credible way.” Despite the crisis of confidence, Dr. Neiss has dismissed the possibility of Japan turning into an Argentina due to its huge savings.

Faster than others
The improvement in global demand will spell recovery for Asia’s exports, and to a large extent, its GDP. China and India will grow by 8% and 6%, respectively. The rest of Asia, on the other hand, will expand by 3% to 6%.

Dr. Neiss nevertheless warned that the global recovery might be derailed by adverse political events related to the war on terrorism and the Middle East conflict.
Below potential

From his own point of view as a business journalist, Bloomberg Editor-at-Large Lee Miller also shared Neiss’ perspectives on the US recovery and on the world. He notes that Federal Reserve Chairman Alan Greenspan already announced that the US economy will grow from 2.5% to 3.0%, close to its 3.5% potential. Microsoft Chairman Bill Gates foresees no big uptick in the Nasdaq in 2002. Miller noted that the 11th cut in Fed rates last year was “an insurance against prolonged economic weakness.” Dale Thomas, Rothschild Asset Management Director, observes strong consumer confidence behind the recovery.

Hedging
Miller also brought up the issue of confidence in Japan. People doubt the accuracy of statistics and government scenarios. Confidence is also weak in the banking system. In fact, the Japanese bought twice as much in gold bullion and coins in the second half of last year than in the first half as hedge against bank failures. The devaluation of the yen has likewise become a concern of China, as it could lead to further weakening of Asian currencies.

Suspicions and worries
Abroad, suspicions arise on the ulterior motives of the Americans in the war on terrorism, despite rhetoric on the axis of evil.

Zeroing in on Asia, Miller also gave his analysis. While US troops are deployed in an advisory capacity in joint military exercises with the Philippine military, it could not be done in Indonesia. Americans are not inclined to put more money into China. Nevertheless, they are open to joint ventures there. There are concerns over the convertibility of its currency and the replacement of President Jiang Zhemin next year. Foreign direct investments, therefore might be directed towards places like the Philippines.

Good mood
For the Philippines, Bloomberg reiterated Moody’s favorable outlook on fiscal soundness and sustainable growth in the face of challenges in “instituting good governance in both the public and private sectors.” Bangko Sentral Governor Rafael Buenaventura said Moody’s thinks the political environment in the Philippines is stable.

Footnote on morality
According to Miller, George Soros believes society needs morality since financial markets are amoral. The accounting issues surrounding Enron and Global Crossing, in particular, in the United States have created ripples overseas. Now it is difficult to trust the auditors of company books, including firms abroad which need to attract foreign investments. The call for transparency and widespread dissemination of information has risen from credible quarters such as Cisco’s John Chambers and Fed Chairman Alan Greenspan.