Buyers: Recession, deflation unlikely
By Staff -- Purchasing, 5/21/1998
In a recent poll of readers, Purchasing asked buyers if they thought the crises in Asia could lead to a cycle of global deflation and recession. Only one in ten buyers is truly concerned about the prospects of world recession and deflation, versus 56% who say there is no threat, and 33% who express no opinion. Noteworthy is that most of the pessimists make their answer contingent upon a worsening of economic conditions in Japan. For example, Jerry Joyce, capital equipment and tooling manager for Nypro Americas in Clinton, Mass., says the recession-deflation scenario is possible "only if Japan's economic woes continue to worsen." Another PM says, "Japan is the key to world recession. If the Japanese market collapses, I think we will see a global impact." There is always a risk of recession, says the director of purchasing for a Calif.-based bicycle manufacturer. "Let's see how, and when, Japan pulls out of its troubles."Among the optimists, most believe there are too many controls and safety valves in place to allow a repeat of the circumstances that led to the Great Depression. Miguel Davalos of Dayton Rogers Manufacturing in Van Nuys, Calif., says, "The economy has seen this before and precautions will be taken to minimize the effects of the Asian situation." An Oregon PM agrees: "There are too many safeguards in place."
These views echo those expressed recently by the International Monetary Fund (IMF). In its recently released World Economic Outlook, the IMF says a global deflation cycle is unlikely to develop because central banks and governments are better equipped now to deal with economic and financial crises than they were in the 1930s. Four key differences between now and then:
* Exchange rates are predominantly flexible, allowing countries to alleviate the effects of deflationary shocks by "allowing their currencies to depreciate under market forces."
* Without the constraints of the gold standard, central banks and governments "have more leeway to adjust monetary and fiscal policies to help to offset any adverse impact on demand from the Asian crisis."
* Central banks are now seen as "lender of last resort in preserving financial market liquidity in a crisis." Advances in financial market supervision and regulation "have played an important role in increasing resilience to shocks in the advanced economies."
* A system of cooperation among nations, "works to avoid policy responses that are harmful at the global level and provides financial support for corrective measures designed to minimize adverse effects both in the countries taking them and internationally."
In addition to these differences, IMF says, "the prospects for sustained moderate growth in the world economy also argue against any imminent threat of global deflation."
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