The global economic crisis has been declared over by some, but others aren't so sure.
For banks, either viewpoint suggests a more complex business climate than has been the case over the last few years. If the worst is truly past, the biggest peril may be inflation and higher interest rates. If not, the risk could be deflation and falling rates.
Federal Reserve Chairman Alan Greenspan last week cited "tentative signs that we may be through the worst of the crisis abroad." But he said policymakers remain "particularly sensitive to how fast the world can shift beneath our feet."
Many economists have recently highlighted stable or improving conditions in various troubling or soft spots. Even Japan, after nearly a decade in the economic wilderness, is seen as finally moving toward a more sustained recovery.
"The world economic situation has taken a pretty dramatic turn for the better," said Kenneth T. Mayland, chief economist at KeyCorp, Cleveland. "Asia is in various stages of rebound, with Korea leading the way in recovering lost output. Others may be lagging, but are not falling anymore. And Japan is looking better."
Meanwhile, he added, "Latin America is not as bad as we thought it would be in January, and even Russian industrial output has rebounded significantly from the late fall." As a result, many commodity prices have stabilized, and the price of oil, of course, has rebounded.
If global demand grows, so eventually will inflationary strains, as a number of economists see it. And Mr. Greenspan said last week at a conference in Chicago that "inflationary pressures could reemerge, possibly faster than some currently perceive feasible."
But at the same time, others worry that an inherently deflationary worldwide problem of too much productive capacity, built on the extraordinary investment boom of the past decade, has not been resolved.
"The world's economic growth is still on a decelerating trend, and overcapacity has worsened," said David A. Levy, forecasting director at Jerome Levy Economic Institute of Bard College, Annandale-on-Hudson, N.Y.
He attributed recently improved global conditions to the "garden hose" effect. "The financial turmoil of the late summer and early autumn of 1998 disrupted economic activity the way someone stepping on a garden hose reduces the water stream," he said.
"When conditions stabilized, it was as if the hose had been released and built-up pressure unleashed," he said. "There was a surge in sales and orders as activity resumed and delayed transactions were executed." But, he cautioned, "the spurt of resuming activity should not be confused with global recovery."
Sustained global acceleration, he said, "would require either a sharp increase in worldwide consumers' propensity to spend, a surge in foreign fiscal stimulus, or a revival of fixed investment. None are on the horizon."
For the U.S. economy, Mr. Levy said he thinks momentum will begin to fade and the long expansion will probably end during the second half. Corporate profits, which rebounded in the first quarter, will slip again "and fall at an accelerating pace in the second half."
By yearend, a recession may well have begun, accompanied by deflation, he said. Interest rates will be "sharply lower by yearend" with the Treasury's long bond yield falling to 3.5% in the first half of 2000, and the federal funds rate plunging to 1%.
