DAVOS, 22 January 2004 — The global economic recovery has cheered economic experts meeting here but they nonetheless warned yesterday of uncertainties ahead, especially if a rebound in the United States loses momentum.
“I am very bullish about the US economy ... (and as a result) the world economy,” said Jacob Frenkel, president of Merrill Lynch International. Speaking during a debate at the annual World Economic Forum in Davos, Frenkel said the US economy was extremely flexible, deregulated and capable of reacting rapidly to any external shocks, in contrast to Europe.
The growth in US productivity over the past few years was “nothing short of spectacular,” he said.
Stephan Roach, chief economist at Morgan Stanley, was not quite as enthusiastic. “The world economy is getting better in the last two quarters,” he told the debate. But the United States faced several “extreme imbalances” and it appeared unable to generate new jobs despite the accelerated production rate.
The imbalances — notably mounting debt and a lack of savings — were encouraged by tax reductions and monetary policy used to revive the US economy. For many economists, the heart of the problem lies in Washington’s huge budget and current account deficits.
These underlying problems in the United States could have a serious impact on the world’s nascent economic rebound, economists warned. For the time being, Europe was also enjoying an economic revival but at a much slower rate than the United States, they said.
The flexibility of the world’s largest economy explained its current bill of health, in contrast to the European economic zone, said Frenkel. The difference in dynamism between the US and European economies is partly due to the European Central Bank’s inability to be reactive and flexible on monetary policy, according to Laura Tyson, a professor at the London Business School and former US economic advisor during the Clinton presidency. A greater ability to react would help to compensate for the negative economic impact of the recent rise in the euro, she said. Europe’s central bank has a “misguided” policy, by refusing to loosen monetary policy and to combat the recent rise of the euro against the dollar.
“It is a mistake to not offset ... (this) by flexible, rapid monetary policy,” she said.
Japan, the world’s second largest economy, was also on the mend, enjoying economic growth of about two percent in 2003 and forecasting to do slightly better this year. “Japan’s economy is growing nicely,” Takatoshi Ito, a professor at the University of Tokyo, told the debate. However, with a worrying track record of slipping back into recession — once in 1996 and again in 2000 — he remained cautious about the future trend.
“There is a risk, there are also worries,” Ito said, noting that a steady rise in the yen against the dollar was a real cause for concern. As for the Chinese economy, it is not in danger of overheating and yearly growth rates of around eight percent were sustainable, said Fu Jun, Deputy Dean of Peking University and a highly-regarded Chinese economist.
Jun said: “I do not see a compelling case that the overall economy is overheating,” thanks to China’s current account surplus, the low level of inflation and the state of the country’s labor markets. Some sectors may be showing signs of overheating, but these were being addressed by the government, he said. He added that there was a “very high probability” that China would be able to sustain the high growth rates seen in the past two decades.