US EXPERT SEES DANGER
OF A WORLDWIDE RECESSION

By Lars Borchert

[Economic expert C. Fred Bergsten sees acute dangers for the worldwide economic situation. The recently increased growth rates are endangered if these risks are not immediately tackled. A new recession is possible.]

[This article originally published on September 10, 2004 in the Berlin Netzzeitung is translated from the German on the World Wide Web,  http://www.netzeitung.de/spezial/globalvillage/304504.html.]

Jubilant bells resounded a few weeks ago. The International Monetary Fund (IMF) raised its growth forecast again for the world economy and predicted a 25-year high for 2004. Worldwide growth should reach nearly five percent, it said. In 2005, the growth will still be 4.4 percent despite the constant climbing oil price.

However C. Fred Bergsten, world- renowned economic expert and director of the International Economic Research Institute in Washington, now puts a damper on the burgeoning euphoria. In the online edition of the British economic magazine “The Economist”, Bergsten identifies five concrete risks that hang menacingly over the world economy like a sword of Damocles.

THE RISKS IN THE US ARE HOMEMADE

Three of the greatest risks come from the US and are partly homemade by the Bush administration, Bergsten says. He identifies another risk in a massive uncontrolled decline of the Chinese economy and the fifth in the oil price rising irrevocably.

In addition, that “most of these problems are mutually conditioned”, Bergsten emphasizes, could lead to a fatal chain-reaction. Another oil price shock, the collapse of the dollar or another skyrocketing US budget deficit could lead to recession, higher inflation or exploding interest rates.

Bergsten sees the three risks in the US as closely connected: “An increasing hole in the state budget – on the roundabout way through the growing deficit of the trade balance – leads to an intensified protective tariff policy and further weakening of the dollar.

RECESSION IN THE US THREATENS

When US president George W. Bush took over the government at the beginning of 2000, his predecessor Bill Clinton left him an impressive budget surplus. However in the meantime the US is running an enormous trade deficit and an exorbitant budget deficit.
The new administration elected in November 2004 must systematically reduce the deficits. Otherwise inflation threatens. America within the next two years could lead into a recession, Bergsten warns. This recession will spread to Europe on account of the inevitable upgrading of the Euro. Experts see the Euro at 1.50 dollars or more in this scenario.

In his prognosis, Bergsten refers to Paul Volker, Alan Greenspan’s predecessor as head of the Federal Reserve. Volker predicts with a 75-percent probability a drastic fall of the value of the dollar within the next five years.

HARD LANDING OF THE CHINESE ECONOMY

Risks are not only lurking in the land of formerly unlimited possibilities. The boom in the Chinese economy amounted to 20 percent of the worldwide economic growth in the past three years alone. However this development cannot continue according to Bergsten. “Driven by run-away credit and an unreasonable investment level – that alone amounts to half of the gross domestic product of the country -, the Chinese growth must be slowed down”, he explains. Competent politicians with great sensitiveness and circumspect monetary policy measures must prevent a belly-landing of the whole economy.

“If China attempts to steer its excessive economic boom in orderly paths, this will lead to a seven-year decline in growth”, Bergsten says. “The effects on worldwide growth will be considerable” whether there is a decline in growth or a dramatic belly-landing.

THE IMF WARNS OF CHINESE RISKS

In this point, Bergsten’s scenario corresponds to the most recent IMF report. The China experts of the International Monetary Fund point to necessary measures to tame the overheated business climate in the economic wonderland of the middle.

Several IMF directors advised the Chinese central bank to tighten its monetary policy to guarantee a moderate economic cooling down. In the first six months of 2004, the Chinese gross domestic product amounted to an annual rate of 9.7 percent. Therefore the IMF raised its aggregate annual forecast from 8.5 percent to nine percent. If the efforts of the Chinese government for moderate growth should succeed, the IMF still predicts a growth of 7.5 percent for 2005.

CONSEQUENCES OF AN OIL PRICE SHOCK

Bergsten names the threatening explosion of energy price as the last risk that is already felt worldwide. A few days ago, the crude oil price registered an historical all-time record of $50 per barrel (159 liters). In view of the constantly rising demand, the price could rise to $60-70 per barrel even without greater political problems or terrorist threats.
With the continuing attacks in the Middle East and Russia, Bergsten sees the danger that the price could climb even higher. This development will be very dramatic since every rise of ten dollars per barrel means a decline of the annual worldwide growth rate of a half percent – or $250-300 billion, Bergsten calculates. This loss will not be offset for several years.

Not long ago Fed chief Greenspan in speeches before the US Congress and economic representatives repeatedly emphasized that the three recessions of the post-war time were triggered by Bergsten’s fifth risk, an enormous rise in the oil price.

SUSTAINABLE POLITICAL MEASURES ARE NECESSARY

If only one of these five risks occurs, this will cause a clear decline of the IMF’s current growth forecast, Bergsten stresses. If two, three or even all five occur, that will mean the end of the present economic course. The world economy will enter into a recession. The consequences will be a suddenly increased inflation, considerable higher interest rates, greater unemployment, currency conflicts and escalating protective tariffs. This scenario could even turn out more depressing in view of the terrorist attacks threatened worldwide according to Bergsten.

To prevent this, the Washington economic expert urges resolute actions from his government: conversion of long-overdue measures to offset the budget holes. At the same time China must no longer live in the political shadows and take a decisive leadership position in the limelight of world politics. The challenge of the oil-producing countries and the leading economic nations is to prevent the threatening oil price shock and guide prices in reasonable paths. If this does not succeed, the present rosy forecasts of the IMF for worldwide economic growth in the coming years will dangerously hang in the balance.