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The Economic Outlook Varies by Region

January 1, 1999
Related Topics: Global Business Issues, Featured Article
The current economic outlook? Today, all significant international markets, with the exception of Europe, are slowing. Economic growth will remain soft and will significantly impact worldwide activity. In 1997, the world economy grew 4.2 percent. In 1998, it grew approximately 2 percent. The International Monetary Fund expects it to grow to 2.5 percent in 1999.

"Time has to pass," says Mitchell Held, co-manager of U.S. Economic Research for New York City-based Salomon Smith Barney Holdings Inc. "We have to see some shutting of capacity worldwide. We have to see some reform in banking systems in Asia and some proper policy movements in Latin America."

Analysts concur: Asian countries currently in recession will continue in this downturn well into 1999, but possibly at a lesser rate of decline. The countries that were hardest hit include Malaysia, Indonesia, the Philippines, Korea and Thailand. Asia Pacific will go from 6.6 percent growth to 1.6 percent growth. In fact, the "Asian Economic Survey" (a special report by Wall Street Journal Interactive) paints a dismal picture of continued contraction in the region for the next year. However, currencies appear to have stabilized, and China, Taiwan and India will have respectable growth rates.

According to Gerald D. Cohen, senior economist at New York City-based Merrill Lynch, the most significant Asian economy to the U.S.—Japan—will experience difficulties, albeit necessary ones that will differ from the rest of the region. "Hopefully [Japan’s] economy won’t shrink significantly more in 1999 [than in 1998]. But if the Japanese get their Reform Bill on line, that will actually lead to more job loss and more slowdown," he says. "If they close banks, it will lead to bankruptcy in banks, and it will lead to bankruptcies in corporations as they write off bad loans. You will see a slow down before you see a pick up."

The Asia situation will continue to bottom-out over the next few quarters, and then analysts predict a protracted bottom before it turns around. In the next couple of years, a lot of the problems (related to overbuilding and excess investment) will be addressed and growth will begin to pick up.

On January 4, 1999, the euro becomes a legitimate currency, trading in 11 countries (see "The Euro—It’s No Small Change," on page 12). Including the United Kingdom, this region is regarded as the most stable economic unit with which the United States trades. Certainly the European Economic and Monetary Unit will present questions and challenges for Americans doing business in the region.

Russia remains a terrifying question mark. In the near-term future, Eastern Europe will have negative growth. Companies with dealings in the region will face similar problems to those in Asia—but on a smaller scale.

Latin America
Latin America is crucial to the United States because American businesses have significant exposure in the region. Brazil has initiated more than $10 billion in budget cuts and has interest rates at 30 percent (according to Business Week). If Brazil avoids devaluation, then expect it to face a mild recession with a decline in growth of 1 percent to 2 percent. The rest of Latin America will avoid a recession, but growth will be a slow 1 percent to 2 percent increase.

Currently, fundamentals in Mexico (because of economic reforms after the 1994 peso devaluation) and Argentina are healthy. However, if the Brazilian real cracks, there will be pressure placed on other Latin nations, particularly Argentina. In this case, analysts expect a significant recession in Brazil that may reach from Tierra del Fuego past the Rio Grande, and possibly into the United States. One interesting phenomenon to watch: the Mercosur—an economic alliance between Uruguay, Paraguay, Argentina and Brazil—may encourage greater cooperation and stability, especially between Brazil and Argentina.

North America
Be prepared for further profit squeezes. Held estimates that earnings for the Standard & Poors 500 will average zero in 1998, 1999 and 2000. This compares to 10 percent in 1996 and 1997, and with 20 percent in 1993, 1994 and 1995. Most analysts expect the economy to pick up strength by the end of 1999.

Global Workforce, January 1999, Vol. 4, No. 1, p. 8.

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