Column

ECONOMIC JOY TO THE WORLD

The global economy is poised to have record growth in 2004

DONALD COXE December 15 2003
Column

ECONOMIC JOY TO THE WORLD

The global economy is poised to have record growth in 2004

DONALD COXE December 15 2003

ECONOMIC JOY TO THE WORLD

The global economy is poised to have record growth in 2004

Column

DONALD COXE

THE NEWS of the geopolitical world is mostly depressing: suicide bombers, terrorists, antiSemitism, Iraq, anti-Americanism and nuclear programs in North Korea and Iran. The good news at this season of good tidings is that the economic news is mostly good. Indeed, if it weren’t for the activities of those who destroy, not produce, this would truly be a time for comfort and joy.

The global economic recovery, which was struggling to get established during the spring, has survived the Iraq war, SARS, and higher-than-expected energy prices. It is no longer

in survival mode: it is gaining strength by the week, suggesting that 2004 will be the bestever year for the global economy.

Why? First, because global central banks, led by the Federal Reserve in the United States and spooked by recession, flooded the world with liquidity, driving interest rates to multi-decade lows.

Who wins from low rates? Consumers buying on credit, homeowners with mortgages, corporations and governments. All classes of borrowers find credit more readily available, and all classes of borrowers have the opportunity to restructure their loans to reduce their debt-servicing costs. Workers are more secure, because their employers are under less financial stress. If they are currently unemployed, they’ve got a better chance of a new job. Manufacturers and retailers benefit, because they sell more goods.

Financial institutions benefit, because their loan portfolios get stronger, as fewer loans go bad, and some troubled loans previously in trouble get healthier.

Who loses? Lenders, and investors who save through short-term deposits. (Those who invest through long-term bonds get capital gains as rates fall so they become, briefly, richer, but as they reinvest their income and buy more bonds, they find their income falling sharply.) In general, sustained low rates are bad news for investors who save through fixed-income investments.

As the recent history of Japan attests, merely lowering interest rates does not, in itself, produce strong economic growth. In fact, it can produce slower growth in a thrifty society heavily populated with aging and elderly people who save. What is also needed is a set of strong reasons for people and corporations to risk their capital in search of higher returns, and a set of strong reasons for consumers to buy houses, cars and other goods that will last for years. What is needed on a global basis is a surge in the number of people and corporations who have the wherewithal to make long-term commitments at a time that those strong reasons for committing funds are emerging. Fortunately, the rising middle class in China and India is more numerous than the population of North America, and it is on a fast-growing spending

FORTUNATELY, the rising middle class in China and India is more numerous than the population of North America, and it is on a fast-growing spending spree

Governments can help, too. For example, George W. Bush’s tax cuts were the major contributor to the astounding 8.2 per cent American GDP annualized growth rate in the third quarter. The Chinese government’s turnaround on the control of SARS was decisive in saving that economy from sliding into the kind of instant recession that the disease inflicted on Hong Kong and Singapore.

Help has also come from two unlikely governments—France and Germany—and in an unlikely form. These two engines of Europe, which have mostly been wheezing and sputtering on side tracks as the U.S. roared ahead, have helped the global economy by violating their treaty with their brethren in the rest of the Eurozone. The November news that sent European stocks and the euro higher was the decision by France and Germany to repudiate, until further notice, the 1997 Stability and Growth Pact in which they pledged to limit fiscal deficits to three per cent of GDP, except during severe recession. (That France would ostentatiously break promises it found inconvenient to its national interests is not big news. Gall is a word one associates with Gaul, and de Gaulle of “Québec fibre” fame.) France and Germany have exceeded those limits for two years, even after some creative accounting to reduce the stated deficit levels. They mean to keep on violating the limits.

Why is that good news? Because France and Germany have been flirting with—or are in—recession for more than a year and the only way they could meet the strict deficit limits would be to raise taxes, since both countries are committed to heavy spending on almost every function of their bloated governments except the military. Yet, in a sudden joint epiphany, prime ministers Jacques Chirac and Gerhard Schröder have decided their flaccid, flabby economies need tax cuts, not tax boosts. Result: business confidence is rising across the Eurozone, Brussels Eurocrats are and sulking and global economists are raising their estimates for European economic growth. Merci and danke.

Canadian growth was hit by SARS, but it will rebound along with the rest of the economic world. With the loonie now looking as good as gold, and the U.S. economy finally growing faster than Canada’s, Bank of Canada governor David Dodge will be able to declare victory over inflation and lower rates anew.

For Homo Œconomicus, the cry is “Lots more in ’04.” Hül

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. dcoxe@macleans.ca