Slump Stirs Specter of Worldwide Recession

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Slump Stirs Specter of Worldwide Recession

Quick U.S. Recovery Appears Unlikely

By Steven Pearlstein Washington Post Staff Writer Sunday, November 4, 2001; Page A01

At the Hyatt resort in Bali, 80 percent of its November bookings -- British car dealers, European druggists and Hong Kong bankers -- have been canceled.

In Japan, everything now comes with zero percent financing -- and even so, loan demand is so depressed that some banks are simply depositing their excess cash in other banks.

In Argentina, auto sales are down so much -- 40 percent, compared with this time a year ago -- that Fiat has been operating its plants there just one week a month.

And the annual staging of "Aida" at the Great Pyramids at Giza, a high point of Egypt's tourist season, has been canceled because of security concerns.

What already was a global economic slowdown has been gathering momentum since Sept. 11, dashing hopes for a quick U.S. economic turnaround and raising the specter of worldwide recession. J.P. Morgan Chase & Co. now forecasts that global economic growth will barely exceed 1 percent this year and the next, which would be the worst performance in 20 years.

Taken as a group, the major industrialized economies of the world -- the United States, Canada, Japan and Europe -- are growing weakly or shrinking, while the once red-hot economies of Asia and Latin America have fizzled. Even worse off are many Caribbean and African nations, where the tourist drought and the collapse of commodity prices have hammered already fragile economies.

The only nations that appear to be weathering the global downturn -- India, China, Russia and some in Eastern Europe -- are those that have resisted full integration into the world economy, retaining vestiges of socialism and protected markets.

But almost everywhere else, industrial production is falling, unemployment is rising, profits and stock prices are depressed. The volume of cross-border trade is shrinking while cross-border investment has dropped by half. Governments, facing declining tax revenues, are adding to their debts, cutting payrolls and social benefits, or both. Consumers everywhere are hunkering down.

"We see the global recession turning into a mighty snowball that just seems to be growing and growing," said Roberto Faldini, a director of Brazil's largest industrial association.

"It's tough to see where the bottom is in the current environment," said Teruhisa Tokunaka, Sony Corp.'s chief financial officer.

The speed and intensity with which the downturn has spread from one country to another has surprised economists, policymakers and corporate executives and revealed the extent to which national economies have become inextricably linked.

As a result of the ebb and flow of investment across borders, Wall Street's woes are shared by Saudi princes and Swiss insurance companies, while the financial problems of Japanese banks translate directly into unemployment in South Korea and Thailand. A drop in sales anywhere can seriously impact corporate profits half a world away.

The globalization of supply chains -- producing parts in one place for assembly somewhere else -- has turned areas of Mexico and Canada into economic suburbs of Detroit; the economies of Ireland, Finland and much of East Asia hang on the fortunes of the U.S. technology sector. It's no longer possible to talk about overcapacity in the German machine tool sector or overproduction of Brazilian steel. Such supply excesses afflict global, not national, industries, triggering simultaneous price cuts in all markets.

Global distribution and marketing have also helped link national economies so they tend to turn up and down together. It's not just Wal-Mart, Coca-Cola and McDonald's that have become powerful global brands -- now there is Nokia and Toyota, Prada and DeBeers. And after a decade of cross-border mergers and acquisitions, the biggest banks, chemical manufacturers and drug companies in Germany, Argentina, Singapore and the United States are all largely the same.

The attacks of Sept. 11 also have revealed how economically significant travel and tourism are to the world economy. From cultural capitals to faraway game preserves, legions of chambermaids, waiters and taxi drivers are out of work or earning half as much as they used to. Airlines and cruise lines are warning of bankruptcy, with government bailouts already in the works in Switzerland, Jamaica, Canada, Ireland and Belgium as well as the United States. Massive layoffs have been announced at the companies that make the planes and the ships.

Nowhere are these various trends more evident than in Asia, where the double-digit growth rates of early last year have largely disappeared. Economists at J.P. Morgan Chase estimate that the economies of Japan, Singapore, Malaysia, Thailand and Taiwan will all contract during the final three months of this year, with South Korea and Hong Kong barely remaining in positive territory. And without a strong U.S. or Japanese economy to pull the region out of its slump, forecasters warn this downturn will last longer than the Asian crisis of 1997-1998.

"We have to prepare for drawn-out economic hardship," Hong Kong's top government official, Tung Che Hwa, warned in a speech earlier this month.

While the poor always bear the brunt of any recession, this one has hit hard at the pride and pocketbook of Asia's new and burgeoning middle class.

Park Me Hee, 38, was laid off six weeks ago from her job as a human services specialist at Samsung Corp.'s headquarters in Seoul and has been unable to find another job. A widow with a 10-year-old daughter, she now tries to peddle Amway products to survive.

"I made good money -- $3,700 a month -- as a manager for the biggest company in Korea," she said. "Now I have to humiliate myself asking my friends and family to buy cosmetics and kitchen supplies. And nobody wants to spend money."

In South Korea as elsewhere in Asia, where electronics exports can account for anywhere from a quarter to half of a nation's economic activity, the tech bust threatens to unwind years of economic progress. Years of overinvestment have left the region with more factories making chips and disc drives than the global economy can sustain, triggering a vicious price war across the region.

This week, for example, the South Korean government was forced to effectively nationalize Hynix Semiconductor Corp., the world's third-largest maker of memory chips. All 14,000 employees have been told they must take one month of unpaid vacation. Several Japanese companies, meanwhile, are preparing to file a formal complaint with their government alleging that Hynix and Samsung have been dumping chips at prices below the cost of production, forcing the Japanese businesses to lay off workers and cut production at plants throughout Asia.

Strolling the crowded streets, shops and restaurants of Tokyo these days, one might not realize just how deep the Japanese economy is stuck in the mud. Now in its fourth recession in 11 years, Japan's consumer spending has dropped for five months straight, and bank lending has declined in each of the past 44 months. The unemployment rate, at 5.3 percent, is the highest in the postwar period. The Nikkei index of Japanese stocks stands where it was in 1986, while property values are at levels not seen since 1975.

China's economy continues to expand, but even there, growth has slowed from an 8 percent annual rate to 7 percent because of waning exports to the United States and Japan. And China's success, in many ways, has come at the expense of the other Asian economies.

Since 1997, Morgan Stanley Dean Witter & Co. said, the pace of direct foreign investment in China and Hong Kong has more than doubled, to $100 billion, while investment in the rest of non-Japan Asia has fallen to $25 billion from $30 billion.

Developing countries have far worse problems. For many, the primary source of foreign exchange -- the money they need to service their debt and import the industrial goods they need to modernize their economies -- comes from selling natural resource commodities. And for the most part, those are now trading at recession levels, with prices off 40 percent on average. Among those feeling the impact most keenly are the Ivory Coast, the world's biggest producer of cocoa; Guinea, with a third of the world's known reserve of bauxite; Kenya and Sri Lanka, the biggest producers of black tea; and Zimbabwe, a major source for nickel. The plunge in coffee prices has affected economies from Colombia to Kenya to Vietnam. And while lower oil prices help consumers in the industrial world, they lower incomes in Nigeria, Mexico, Russia and the Middle East.

It does not help that in many developing countries, the other major source of foreign exchange is tourism, which has slowed to a trickle since Sept. 11.

"Generally speaking, the American business is shot," said David Sugden, regional sales manager for Abercrombie & Kent in Nairobi, where business is off by half for safari packages that range from $2,500 to $8,000 per person. Even worse, bookings for early next year have virtually stopped, he said.

"With the Americans, it's not a case of dropping the price," Sugden said. "They're not going to travel."

While the reasons are different, economic conditions are not much better across Latin America.

In Argentina, now in the third year of a brutal recession, the economic problems stem from unsustainable debt levels and a currency pegged to the strong U.S. dollar, which makes Argentine exports uncompetitive on world markets. Argentina's president all but acknowledged Friday that the country has no choice but to default on its debt by pressing lenders to voluntarily accept losses on their Argentine bonds.

Graciela Naum, a women's clothing manufacturer and retailer in Buenos Aires, was forced to close one of her four showrooms and lay off most of the high-paid managers on her sales force of 17, replacing them with younger, less expensive employees. And since Sept. 11, Naum has put off plans to expand to Amsterdam.

"There is just too much uncertainty now to risk the investment," Naum said last month. "Before it was just Argentina that was in trouble. Now it's Europe, the United States, everywhere. This is not the time to be taking chances with your business -- at least that's the way I feel right now."

Next door, Brazil's economy, already weakened by energy and debt crises and a weakening currency, now has to deal with sagging demand for its products on world markets.

It's a lot simpler to explain the sudden downshift of Mexico's economy, which went from growing at an annual rate of 6.9 percent last year to something close to zero this year, according to private estimates. Under the 1994 North American Free Trade Agreement, which has largely phased out trade barriers between the United States, Mexico and Canada, exports to the United States had become the high-octane fuel of the Mexican economy. But as U.S. growth stalled, so did Mexico's growth. The attacks made it worse, with increased security checks at border crossings causing waits of up to five hours.

"It's a very stressful time because tomorrow you don't know if you will have a job or not," said Ricardo Anguilar, a computer systems engineer with a bank that has been laying off workers in Mexico this year. "The Mexican economy depends on the U.S. economy, and the U.S. is at war. Everywhere you go people are talking about losing jobs and worrying that things are going to get worse."

The electronic and textile plants clustered south of the U.S.-Mexican border have shed at least 150,000 jobs this year. In addition, hundreds of Mexican shops and restaurants that cater to U.S. day visitors are reporting sales down by 50 percent or more as Americans opt to forgo the border hassles.

Also weighing on the Mexican economy is concern over the flow of money sent back to the country by Mexicans and Mexican-Americans working in the United States. Though this amount is difficult to calculate, some reports show it has begun to decline, after reaching a record annual pace of $9 billion earlier this year.

The story is similar on NAFTA's northern front. The sharp decline in energy prices, new tariffs on lumber exports to the United States, the slowdown in auto and aerospace production and the collapse of the telecommunications market have all taken the wind out of the sails of the Canadian economy.

The fallout from the U.S. tech bust has also reached Ireland. After growing last year at the torrid rate of 11.5 percent, largely on the strength of increased production of computers, semiconductors and telecommunications equipment, Ireland's economy has dropped to a 2 percent annual growth rate, according to some private forecasts. In the three months from May to July, output from Ireland's factories fell 13 percent.

Friends First, a Dublin bank, estimates that layoffs by Gateway Inc., General Semiconductor Inc., Motorola Inc., Dell Computer Corp. and Xerox Corp. have resulted in the loss of 10,000Irish tech jobs this year.

Elsewhere in Europe, tech sector giants Philips Semiconductors, Siemens AG, Ericsson SpA, Nokia Corp. and Alcatel have notified unions of plans to eliminate tens of thousands of jobs. "We're clearly in a risky period," Alcatel Chairman Serge Tchuruk said this week as he forecast a $4.5 billion loss for the year and added another 10,000 job cuts to the 20,000 previously announced.

The economic slowdown in Europe has come as a surprise and embarrassment to political leaders and central bankers, who boasted earlier in the year that their economy would remain largely immune to the effects of the U.S. downturn. What they have since discovered is that the tech cycle's rhythm of investment and innovation appears to be felt simultaneously on both sides of the Atlantic. And while European exports to the United States may be modest, as European leaders were once quick to point out, exports to the rest of the world are more significant -- and much of the rest of the world has responded to the American downturn.

Serious cracks are also appearing in Europe's once high-flying financial sector. In the past few weeks, two giant American firms, Merrill Lynch & Co. and J.P. Morgan Chase, each announced cuts of 6,000 jobs in London's financial center. A similar retrenchment has begun in Frankfurt, where German banks have announced 28,000 job cuts, or about 10 percent of their combined payroll.

Meanwhile, Airbus Industries, the European consortium, has frozen plans to hire 3,500 workers, and Rolls-Royce PLC, Europe's airplane-engine builder, has announced layoffs of 5,000.

In Europe, as elsewhere, there is a widespread sense that the economic downturn is gaining momentum, with no end in sight. As Charles Edelstenne, chairman of Dassault Systems SA, the French aerospace giant, warned in an interview last week: "The crisis has only just begun."

Staff writers Mary Jordan in Mexico City, Keith B. Richburg in Paris, Karl Vick in Nairobi, Clay Chandler in Shanghai, Anthony Faiola in Buenos Aires, Howard Schneider in Cairo, Doug Struck in Tokyo and correspondent Roger Dean Du Mars in Seoul contributed to this report.

http://www.washingtonpost.com/ac2/wp-dyn/A36367-2001Nov3?language=printer

-- Martin Thompson (mthom1927@aol.com), November 04, 2001

Answers

My late Father had a saying" "It's time to tighten your belt".

This was his way of saying that lean times were ahead, which seems to apply to the world economy.

-- K (infosurf@yahoo.com), November 05, 2001.


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