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Prognosis
By Michael Alan Hamlin
October 1, 2001
Despite the prevailing skepticism, the Philippines
- on the surface - isn't doing too bad compared to its neighbors.
Manufacturing, agriculture, and services are all up. Investment
is up, although it's mostly domestic and mostly telcoms. But foreign
investment - or rather, the lack of foreign investment - remains
a dilemma. While soft sector inflows are helping prop up the economy,
traditional direct investment has plummeted, with Ecozone investment
less than half of what it was last year.
There are other reasons for concern. Manufacturing
output has actually contracted around two percent, although value
is up over 11 percent due to higher costs. While exports had shown
signs of bottoming out prior to the September 11 assault on New
York and Washington, there is now almost certainly more pain to
come. Meanwhile, luxury hotel occupancy has plunged, and with international
news reports hammering on the Abu Sayyaf connection to terrorist
leader Osama bin Laden, the Philippines anemic tourism sector is
taking another hit it is ill prepared to endure.
The Philippines, of course, is a very small slice of
the pain. The World Bank has trimmed China's forecast economic growth
to 6.5 percent for next year from 7.0 percent, raising the specter
of growing unemployment, bankruptcies, and labor unrest in Asia's
fastest-growing economy. Meanwhile the International Monetary Fund
said before the September 11 tragedy that world economic growth
would be 2.6 percent, just a tenth of a point shy of the mark most
economists view as a global recession.
And since September 11, most analysts and economists
argue that if the world wasn't already in a recession, it is now.
For many, that conclusion seems painfully obvious. U.S. consumers
- the world's principal consumption engine - have suddenly and understandably
closed their wallets. For the few that still have them open, increased
security and fewer international flights have thrown tightly wound
supply chains out of harmony, disrupting supply.
Given these circumstances, is the bottom still far
off? Or are things so bad that despite - or perhaps because of -
the gloom, the bottom is pretty much here? And if it is, is it too
soon to reasonably guess about the future, and recovery?
In fact, no, it's not too early. Take for instance
the Hong Kong and Shanghai Banking Corporation's (HSBC) September
global report, not surprisingly titled, "Attack on America."
There HSBC suggests that while a recession may be unavoidable in
the aftermath of September 11, the U.S. economy "was on target
to bottom out next year, possibly as late as October, and it is
still likely to do so."
That's an interesting forecast, but it's not the -
tactically speaking - near open-ended timeframe that makes it interesting.
Instead, it's the suggestion that the September 11 attack and its
aftermath - including impending and prolonged military action against
terrorist organizations and their benefactors - hasn't really disrupted
the economic cycle. Given that the Dow Jones index dropped 14.2
percent when markets reopened, consumer confidence is at its lowest
level in six years according to the New York-based Conference Board,
and U.S. employment reached a four-year low in August, doesn't HSBC's
argument seem at least a bit too gutsy?
To many it is, and not just a little bit. But it may
not be wise to rush to judgment. Although the very short-term outlook
is dismal, the tragic events of September 11 may eventually be viewed
as the catalyst that accelerated recovery when this is all over.
As perverse as that may sound, at the very least the attack certainly
accelerated the economy's downward trajectory, with the likely bottom
of the current cycle being reached considerably faster than it would
have been otherwise.
More importantly, as a result of the attack the U.S.
government has thrown what promised to be a prolonged debate over
the 2002 budget surplus to the wind. Congress has already approved
US$45 billion in additional spending for humanitarian as well as
security purposes. Another US$15 billion has been approved to bailout
the airline industry, which is likely to result in trimmer but more
profitable carriers, at least for a time, and for now will keep
airlines fulfilling their critical business support role. More spending
is in the works, including up to US$30 billion for the Pentagon.
On top of US$70 billion in tax cuts already programmed for the year,
an additional short-term stimulus package of up to US$100 million
is being discussed, and is likely to be passed.
The result of all that spending - which doesn't include
private-sector investment that will play a crucial role in rebuilding
lower Manhattan, the world's financial and business center - as
in times of past crisis, is likely to propel the U.S. and the global
economy into a period of sustained growth. There are other reasons
to be guardedly optimistic about recovery.
Thanks to the broad coalition that U.S. officials have
carefully and somewhat surprisingly crafted, despite whatever military
action is taken in the Middle East, there is little fear that oil
supply lines will be threatened. As a result, oil prices are near
a two-year low, and the Organization of Petroleum Exporting Countries
is keeping output steady. And there are obvious winners. For every
industry hit hard as a result of the September 11 attack, like the
airlines and insurance, there are others whose outlook has brightened,
like defense contractors, which includes an array of direct and
indirect suppliers.
But things could go wrong. For instance, the U.S. Congress
might decide to back off its short-term stimulus plan, or take action
later than it should. Indeed, Federal Reserve chairman Alan Greenspan
is urging caution, citing fears that too quick action could do more
harm than good when monetary adjustments - chiefly interest rate
cuts - take full effect. And war is expensive. With the surplus
gone, government will be competing with the private sector for funds.
Bond rates are already up on that expectation.
And the U.S. is not likely to get much support from
other developed economies. Japan's economy still hasn't gotten as
bad as it must for real reform to take place. And real recovery
will follow years later. Europe is faltering. In Southeast Asia,
Hong Kong, Singapore, and Taiwan are looking for help, not doling
it out. South Korea is not much better off.
That means U.S. consumers must keep spending, and investors
investing. My bet is they will. Partly because Americans don't "cocoon"
well. But mostly because they don't have to. While terrorism has
changed America, it hasn't - and won't - much change the way most
Americans live. So expect next October to be far different from
this one. But don't expect to have to wait until then for confirmation.
(Mr. Hamlin is managing director of the consultancy TeamAsia
and the author of three books on Asian economies and managing in
Asia. His latest book is Marketing Places Asia, which
is coauthored. His e-mail address is mahamlin@teamasia.com.ph.
If you use a Smart/Talk N Text GSM user, you can text a message
to Mr. Hamlin's mailbox by typing the keyword mikehamlin and sending
it to 200.)
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