There was no disguising the universal gloom as the International Monetary Fund (IMF) issued its latest World Economic Outlook report - regarded by economists around the world as the most authoritative of international economic projections.
Even the USA, which has enjoyed seven years of unprecedented growth, now looks close to being caught up in the maelstrom. What began a year ago with currency crisis in South-East Asia, has already swept Japan into recession and moved on to Russia and eastern Europe. Repercussions have been felt as far afield as South Africa and most recently the countries of Latin America, where economic safety nets are hastily being erected.
Such was the backdrop in Washington at the start of October as the IMF unveiled a bleak set of projections. It is on the basis of these outlook forecasts that many private sector economists, including those inside the major corporations, make their own commercial forecasts and investment decisions. And on the basis of what the IMF has to say, the pain already seen by Asian carriers, could be the prelude to a global downturn in the airline cycle, every bit as vicious as that seen at the start of this decade.
At the heart of the IMF projections is the forecast for world growth. This time a year ago that was expected to run at 4.1% for 1998, a figure which has now been downgraded to 2%. If true that would represent the lowest growth since 1991. Looking ahead, the report sees a mild upturn in1999, with output strengthening to 2.5%, but IMF staff acknowledge that there are substantial downside risks in their forward forecasts.
The report notes: "The potential for a broader and deeper economic slowdown stems from a multitude of inter-related risks which make the current economic situation unusually fragile." It points to the loss of confidence in international capital markets, where it sees a danger of a "prolonged retreat by international investors and banks from emerging markets." Set against the usual language of the IMF that amounts to a blunt warning.
Asia remains a particular area of concern for the Fund and the Group of Seven leading industrial countries. Output in Asia, which grew at 8.2% in 1996 and 6.6% in 1997, is expected to plummet to 1.8% this year, before picking up to 3.9% in 1999. But the Fund is not confident about this forecast, either. It notes that there have been recent setbacks in the region, including larger than expected declines in consumption; loss of confidence; deflation of assets in most countries and the emergence of substantial corporate debt problems.
The most depressing factor in the region, however, has been the weakness of Japan - which accounts for one-sixth of Asian output. As a result of Tokyo's failure to address its banking and growth problems, output will plummet by as much as 2.5% this year, after negligible growth of just 0.8% last year, and there is expected to be little growth in 1999. While Japan's failure to deal with its difficulties has been a significant factor in spreading the gloom from Asia to the rest of the world economy, the Russia problem in August is seen by global policy makers as even more decisive.
Russia's decision to devalue the rouble and declare a moratorium on loans sent profound shock waves through the Western financial system. Moscow's action effectively led to a run on the capital of all emerging market countries as leading banks, hedge funds and other capital market intermediaries sought to cut their losses. The result has been a significant tightening of global credit conditions, damaging growth prospects almost everywhere.
The IMF has pared back industrial country growth from 2.9% last year to 2.1% this year and 1.9% next. In the USA, growth will plunge from an estimated 3.5% this year to just 2% next year. Among the world's three largest economies, the USA, Japan and Germany, only the latter is expected to show a healthy expansion in the run-up to European Monetary Union (EMU) on 1 January, 1999. But with the high exposure of the German banking system to Russia and Eastern Europe, even Germany might found itself floundering as EMU gets under way.
Among the developing countries outside Asia, the outlook is disappointing. Latin America has been badly hit by the risk aversion following the Russian crisis and, despite the efforts to stem the tide, faces a plunge in growth, from 5.1% in 1997 to 2.8% this year and 2.7% in 1999. Similarly, the Middle East will see a sharp drop in output as demand for oil depresses economies.
The only region where the IMF is predicting expansion in the year ahead is Africa, where growth is seen as picking up from 3.2% last year to 4.7% by 1999. But even this projection must be regarded as suspect. Although Africa will benefit from the western debt relief programmes being put in place, South Africa - a key influence on the sub-Saharan economy - has been affected by problems in capital markets.
The IMF has recently been consistently over-optimistic in its measurement of international growth. This year it has sought to adopt a more realistic tone, recognising the many uncertainties, such as the chill pessimism around the international share markets. With the world economy just in positive territory at 2% and the uncertainties in financial markets increasing, the odds on the world moving into recession next year have risen. It is time for carriers to cut costs and expansion plans if they are to survive this downturn in better condition than the last, when there were financing difficulties and bankruptcies.
Source: Airline Business
