"I think this is a robust forecast," says John Lipsky. "It's not based on adventurous ideas." The forecast in question is his bullish view on the US economy, which he says will grow 3-3.5% this year. He adds that the "economic pessimists" on the US economy have been wrong, and a V-shaped recovery has clearly occurred.
The disappointment has been Europe, and it has been the drag on world growth not the US. However, in spite of uncertainties about Iraq, North Korea and other associated geopolitical risks, he thinks global growth will have reverted to around 2.5% to 3% by year end - which was its trend rate in the 1990s.
One element of his forecast, which some may question is the level of oil prices. He bases his assumptions on an average price for the year of $28 a barrel. He reckons the current high prices are "temporary" and says, "We feel that unless Saudi facilities are damaged, oil prices will decline."
He says the recent price hikes have obviously been driven by the Iraq situation, but also by declines in Venezuelan production (now almost resolved) and by Japan's sudden surge in demand as Tokyo Electric shut nuclear facilities and increased its demand by about 600,000 barrels per day. The latter, he says, cannot increase, due to capacity issues.
Should he be wrong about the direction of oil prices, he admits Asia will suffer - particularly Korea, the Philippines and Thailand. Should oil prices spend the year at around $38 a barrel, this would wipe an estimated 1% off Korean GDP growth. However, his colleague, Bill Belchere, the regional economist points out that Korea has $120 billion of reserves and is much better placed to weather two quarters of high oil prices than on previous occasions.
Lipsky also predicts the period of US dollar weakness is "coming to an end". Connected to this view is his verdict on the burgeoning current account deficit in the US, which he says is more about divergence in growth rates between the US and its trading partners - with the former's being stronger.
The fact that this deficit is being financed by Asian reserves is no secret. But Lipsky says Asian central banks have few options but to do so. It is a direct policy choice, he argues. Either they do so, or allow their exchange rates to appreciate, which they all view as an evil.
Lipsky's most interesting theory concerns why the US has bounced back from recession so fast. He produces a chart that shows how US corporations now get 55.4% of their debt finance from the bond markets, versus 35% in 1985. He says this reliance on marketable debt from bond investors (who have to mark their portfolios to market) means that US companies have to be very responsive to the market in meeting their financial targets, if they want to continue to have access to finance. This contrasts with everywhere else in the world where corporates are mostly financed by bank loans and thus need to be less receptive to changes in market conditions and are accordingly slower in their restructuring and decisionmaking.
This situation, unique to the US, ensured that companies turned around their finances very swiftly in this recent recession and deleveraged swiftly. He doesn't mention how the high profile corporate failures at Enron, Worldcom fit into his theory, but it is certainly an interesting view and one that Asian economic policymakers might consider as they continue to encourage the growth of domestic corporate bond issuance.
