The global economic landscape has dramatically changed since the summer. Six months ago the chatter was of synchronous global expansion and the problems of too much growth. No longer. A deflationary quake is speeding toward the shores of the U.S. and Europe. In Asia and Latin America, growth rates are plummeting, competitive devaluations are spreading, prices are falling, and the once-rosy economic prospects for 1998 are clouding up fast. U.S. congressional failure to pass fast-track trade legislation only adds to worldwide contractionary pressures. It comes as the global economy is more precariously poised between expansion and recession than at any other moment in the past five years.
Check the charts. Thailand's expected growth for next year has gone from a 7% rate to -2%; Japan, 3% to 1% (at best); China, 9.9% to 8%; Australia, 4.5% to 3.3%; Korea, 6.5% to 5%; and Brazil, 4.5% to 0%. What started as a narrow financial crisis in Thailand has hit Asia and Latin America. Eastern Europe appears to be next. What is astonishing is both the suddenness and the speed of economic decay.
Everyone has a good reason to tighten. The U.S. is leaning against too-fast growth. Japan is obsessed with saving for the future of its aging population. Europe needs to clamp down for the euro. The International Monetary Fund is pushing Southeast Asia to curb the excesses of crony capitalism. Latin America and Eastern Europe need to defend their currencies. But the virtue of individual actions could become a collective vice if the global economy tips into recession.
It's time for policymakers to reexamine the global scene and coordinate policy. The U.S. Federal Reserve should be wary of tightening into what may be a sharper downturn in 1998. Tokyo should try growing its way out of its problems. And an ineffectual IMF, partly responsible for letting a small Asian financial crisis spread around the world, should encourage more growth among the countries it helps financially.