Neither a dip nor a recession - Deutsche Bank chief economist

Dr. Norbert Walter is the Chief Economist of the Deutsche Bank Group and a member of Deutsche Bank Research, the bank's think tank. With considerable academic and professional achievements to his credit, Dr. Walter also advises Chancellor Schroeder's government. Recently in Chennai, he spoke to The Hindu on the current global economic situation and its near term outlook.

``The downturn in the world economy is neither short and shallow to be called a dip nor deep and long to be termed a recession,'' he says predicting that it will take two years to run its course. ``In 2002 it will be over,'' is his rather confident prediction. Does that sound overoptimistic? The downswing has impacted differently even among the developed countries. Their policy responses have also not been similar. Elaborating, Dr. Walter points out that every downswing looks different. This time there have been certain special characteristics. The hightech decline is specific. Second, Japan is not in the cycle and has structural problems. Some emerging markets are in trouble - Argentina, Turkey, Thailand and the Philippines. ``I pray for Indonesia as well despite having a good team now (under President Ms. Megawati Sukarnoputri).

''But on the other hand I am quite happy with the cyclical policies of India and China, policies that are designed to prevent anything untoward from happening. In common with Germany, India has not realised its potential. We haven't brought our horsepower to the streets. Therefore, we generate more heat than mileage,'' he says.

How does Europe compare with the U.S.? The U.S. has been growing at rates exceeding the most optimistic predictions. Growth rates of around 5 per cent for an already rich country was really a surprise, says Dr. Walter adding that ''many economists including myself felt that there was a need to tighten monetary policy.'' Which Mr. Alan Greenspan, the Chairman of the U.S. Federal Reserve, finally did, commencing early January 2001.

Second, high energy prices have had their impact.

Third, the hype over the IT sector in the U.S. ''They invested like mad, spent like mad and of course it was not sound.''So there was no soft landing as many were hoping. Instead of the 5 per cent growth there has been one per cent growth, which for the U.S. indicates a downswing.

And Europe? ``High interest rates (as in the U.S.) are not a problem in Europe because we did not have that kind of economic momentum.''

Besides, high energy prices, Europe has the problem of high food prices caused by the mad cow disease and other diseases of the livestock. ''So we don't have extra money to spend on something else. All that money went to salmon growers of Norway, lamb producers of New Zealand and beef producers of Argentina,'' says Dr. Walter.

The dollar-euro currency equation is one major feature explaining the difference between the business environment in the Europe and the U.S. From the European perspective, it is important because the euro has been weak against the eternally strong dollar. Explains Dr. Walter: ``We got a hit for the manufacturing industry in the U.S., for Boeing, GM and Chrysler and we got a bonanza for Airbus, European chemical companies and car companies. Our automobile market share has gone up significantly.''

So in the U.S., the downturn is in old and new economies whereas in Europe it is in the old economy only, weak consumption but relatively healthy manufacturing sector. That is the difference between Europe and America. (``In Japan everything is weak'').

Eventual recovery depends partly on the monetary policies pursued by the various countries. Four quarters into the downswing we still have high energy prices, probably because of the OPEC action. That impedes recovery and explains why the downturn will last longer than what the consensus expected.

Because of the disappointment, we will have more interest cuts in the U.S. and in Europe.

Outlook for Japan

As for Japan, everything depends on whether the Japanese Prime Minister, Mr. Koizumi, will undertake or be allowed by the LDP to undertake all the tough measures he is talking about. If he undertakes those measures, a number of Japanese workers will lose their jobs impacting on the Japanese consumption. That will probably push Japan into a full blown recession. A weaker yen will help Japan climb up but if the dollar is weak the yen will remain strong and will not be helpful for Japan.

Ultimately it is the U.S. economy that holds the key, the one superpower, the one entity that can set the economic agenda for the IMF-World Bank meetings in late September early October.

So it becomes important to find out why the interest rate cuts have not so far worked in America. Dr. Walter explains that there is always a lead and lag. The first cut (in the U.S.) was on January 4 so it is not too late as yet. But if we don't see any impact until Easter next year, the lag will be longer than usual.

What is the outlook on energy prices? Unlike previous times, the OPEC is seen to be functioning more efficiently. Even so, Dr. Walter is hopeful that the oil prices will come down. If the OPEC continues with its high prices non-OPEC countries may invest more in their oil fields (the U.S., Russia, China and the North Sea). If these new fields start generating oil, there is a possibility of a dramatic downturn in the prices. Then there is protectionism. Countries that invested heavily in the new fields will insist that they are sold. Hence, given a weak economic global situation, the insistence on high prices is detrimental to the long term interests of the Saudi Arabian peninsula. Moreover, the cost of production of oil in a non-OPEC country is around $12 a barrel, way below the current prices of $24 to 26. There are indications that the inventory reduction in the autumn has been slower and if in November and in subsequent months, there is no unduly cold weather in the Northern hemisphere, the oil prices will collapse.

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