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The Global Economy: Will It or Won't It? The U.S. economy continued to show strength in early 1999, but Japan, Russia and some other economies were troubled, raising questions of a possible global recession ahead. By GSReport Start Date: 2/25/99 U.S. Federal Reserve Chairman Alan Greenspan told Congress on February 23 that the U.S. economy is still doing extremely well and can be expected to grow at a healthy pace, with low inflation, through the remainder of this year. Greenspan noted that after eight years of strong U.S. expansion, "the economy appears stretched in a number of dimensions," and the Fed would keep close watch for signs of either impending recession or sudden inflation. But for the time being, signs of domestic trouble are few and prospects for continued growth are good. The picture is not quite so rosy for much of the rest of the world, however. Greenspan said that he believes Japan has not yet hit the bottom of its steep recession, though perhaps the worst is nearly over. Russia's woes are large and growing, with very little that the Fed or other foreign financial powers can do about it. Brazil's recent near-meltdown has been held in check by swift and competent action in both Brazilian and international markets, but danger remains and vigilance is paramount. Western Europe is slowing down, though not to the point of recession -- yet. So, does this mean the world as a whole will enter the new millennium on an economic up-note, or not? What about fears of a global recession? What Greenspan implied throughout his remarks to Congress, and stated explicitly at several points, is that U.S. Federal Reserve policy has as its primary concern the robust health and growth of the U.S. economy, regardless of what effect such policy may have upon other parts of the world. With that in mind, Greenspan expressed confidence that the United States would have a good year. All around, however, troubles loom -- and it is not at all clear that the United States will remain immune to them. The fact is, there are mixed signals regarding the prospects for the global economy, but the trend in those signals portends trouble. What no one disputes is that Russia is in dire straits. "1999 will be the year of Russia's disintegration," writes Edward Lucas in a recent special report from the editors of The Economist. "The probable decline in Russia's wealth in 1999 will be around 10%. Its banks are, without exception, bust. Its stockmarkets, down to about one-tenth of the levels reached early in 1998, are dead in the water... So expect another bleak and miserable year," Lucas says. He blames wholesale corruption and incompetence in the Russian central government, making it hard to imagine any turnaround in foreign investor confidence in the near term. Will that matter elsewhere? In today's world, it will have to. Greenspan pointed out that last autumn's crash of the Russian ruble was a significant factor in the more recent crash of Brazil's real. But Russia's troubles aren't even fully visible yet. How bad they can really become remains to be seen. Meanwhile, Asian economies continue to flounder, led by Japan's persistent woes; and much of Latin America is teetering on the brink. All in all, "Economies that account for more than one-third of global output enter 1999 either already in recession or seriously stuttering," writes Pam Woodall, economics editor for The Economist. "The world faces its most serious financial crisis since the 1930s," Woodall says. "Indeed, there are disturbing parallels between now and the eve of the Great Depression, such as overvalued share prices, falling commodity prices and excess industrial capacity." But there are also differences, she points out -- differences big enough that a serious recession might possibly be averted. Edward Yardeni, chief economist for Deutsche Bank Securities, agrees that the picture is mixed, but for him the primary signals are decidedly negative. More than most economists of his stature, Yardeni has long insisted that Y2K will have a major downward impact on the global economy in 2000 and beyond. Even apart from that prospect, however, he sees major trouble ahead. "I still see a 70% chance of a global 2000 recession," Yardeni wrote as recently as February 21.
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