Recovery in commodity prices is directly linked to recovery in Asian economies and it seems they are starting to regain their balance after last year’s free fall.
But the climb back to prosperity will be slow and tricky, said Nariman Behravesh, chief international economist and research director of Standard and Poor DRI, a leading economic forecasting and consulting company.
The best that might be said for the rest of 1999 and 2000 is that there probably won’t be any surprises, Behravesh told the Saskatchewan Trade and Export Partnership in Saskatoon.
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“Growth will be weak and the recovery will be weak and that suggests that although (commodity) prices might not be dropping that much more, they won’t rise very rapidly either … . We’ll sort of bump along the bottom for a while,” he said in an interview
Asian economic recovery is vital to agricultural commodity price outlooks. For example, a couple of weeks ago the United States Department of Agriculture released a gloomy outlook of increased oilseed production and building domestic oilseed stocks. But the stocks would be even larger if the department’s forecast of record exports, up 21 percent from 1998-99, is too optimistic.
Behravesh indicated Asia might be in a position to increase food imports.
Standard and Poor forecasts that after two years of losses, Asia’s gross domestic product growth will again reach positive territory in 2000, but growth will be modest compared to the pre-1997 period.
With the possible exception of South Korea, the so-called Asian tigers such as Indonesia and Malaysia have a lot of productive capacity, all debt financed, sitting idle due to lack of demand for exports. The only significant economic activity taking place is government financed.
The big economic engine in the region, Japan, continues in recession.
“This is a horrible time for Japan. It’s the only way to describe it,” Behravesh said.
Most of the Japanese economy is doing poorly and only government infrastructure spending and home building, spurred on by a government program, are showing increases. Government debt is increasing.
The banking system has been propped up by the government but the fundamental problem hasn’t been solved.
“There is this huge, huge, let’s call it a toxic waste dump, of bad loans that are not being eliminated. And the result is banks aren’t lending.”
Behravesh said the Japanese government will probably be forced to take dramatic action later this year and the result will be a lower valued yen.
Although the recovery is tenuous in Asia, other areas of the world are in better shape, he said.
The United States economy, while slowing, is still a powerhouse. It has been riding high for several years but it is not a bubble economy ready to burst, said Behravesh.
The stock market might readjust like it did last fall, but it should rebound.
Europe’s economy has been unimpressive of late. There is weak business confidence, especially in Germany, but a change of finance minister has improved things.
The new currency, the euro, has dropped in value. So have interest rates and that should spur some growth, he said.
Earlier this year there were fears that Brazil would also fall into economic collapse, pulling the rest of South America with it. But the situation has turned around.
Unlike Asia, South America does not suffer from unused manufacturing capacity, does not have overpriced assets and its banking problems are less severe, said Behravesh.
It also benefits because it is tied to the robust American economy.
So long as countries that have been in trouble do not become complacent and stop needed restructuring, Behravesh thinks global economic growth will steadily rebound to pre-downturn levels by 2002-2003.
“The regions that are very dependent on commodities and have been hurt badly by this crisis will begin to see some relief as the worst of this is behind us,” he said.
