Hold the millennium; let the global economy keep growing

The more reliant a country is on electronic systems, the less likely it is to be affected by Y2K problems

THE MILLENNIUM computer bug looms nearer. Every day there is some new story about its possible effects, about preparations for it (or rather against it), about companies declaring that they are Y2K compliant, about banks stockpiling cash, about airlines that have or have not decided to fly over the New Year or, more alarmingly, about airports that will ban certain unnamed airlines from their airspace.

In addition, there has been a spate of stories not so much about the possible effects of the bug, but of precautions being taken for fear of it. To take two this week: a plunge in the number of forthcoming initial public offerings of hi-tech companies as investors become chary of the risks to their business, and an effort by President Clinton to curb excessive litigation resulting out of Y2K law-suits.

As so often happens there is too much information, of too low quality. Nevertheless, it is now becoming possible to make a rough judgement about the dangers to the world economy - not just where they are coming from and how serious they might be, but which parts of the world are most likely to be affected. The picture is still fuzzy, but it is a bit clearer than it was at earlier stages of the countdown.

The big picture of the economic impact of the bug - that it adds to economic activity in the second half of this year, and subtracts from it in the first half of next - is unchanged. A figurative illustration of this see- saw effect, prepared by Goldman Sachs a few months ago, is shown in the chart. We are now into the upswing stage, the period where the bug is boosting global demand. It is boosting it in several ways, the most important being extra economic activity that has being going into computer investment and the still-to-come stockpiling of physical goods in case of disruption of production chains over the new year.

That sort of fits into what seems to be happening to the world economy, at least in the large economies. The US is still racing on, the other English-speaking countries are growing solidly (the UK after a winter pause), continental Europe has picked up a bit, and there are stirrings of life in Japan. The rest of East Asia is making a modest recovery too. Insofar as we can be sure about anything, we can be sure that global demand is not going to be a problem during the second half of this year.

We should also expect some post-millennial fall-back, even if the actual damage turns out to be towards the bottom of the expected range. There will be some running down of inventories, some activity will be postponed, and in industries which cannot stockpile their product (like airlines), some will be lost for ever. Despite President Clinton's efforts, expect too a burst of lawsuits in the first half of next year.

But perhaps the most important single theme that has been emerging is that different parts of the world will be affected in different ways. Curiously, there seems to be a language effect. The large companies in most English-speaking countries are pretty confident that they have fixed their own systems, or will have done so in good time.

It has cost more than they expected and taken a bit longer but there have been benefits on the way - companies understand their systems much better and as a result can see ways of cranking more performance out of them in the future. Outside the English-speaking world the progress is less even: northern Europe seems to be fine, southern Europe more iffy, Latin America and East Asia more worrying still.

China is the great unknown, partly, I am afraid, because so much of its software is stolen and fixing unregistered software can be troublesome. I was told that one group of ex-pats hired to fix a Chinese company's systems went to the original source of the software for information. They were told they would be sued if they touched it - they would be handling stolen goods.

So the disruption will be uneven. As a working rule, the more reliant a country or a company is on electronic systems the less likely it is to be affected by Y2K problems, for it will have made sure the systems work. But eventually, by the end of next year, the issue will be over. Sure, there will be recurring dates at which computers might fail, but once Y2K is handled the world will have experience of a global computer glitch, and will be better at fixing the next one.

There is, however, one other problem, which up to now has attracted very little attention. We won't know what is going on. For three months either side of the millennium all economic and financial data is going to be distorted. Money supply is going to be hopelessly misleading, not just because the banks are stockpiling cash ready for customers who want to go liquid. Companies too will try to build up their cash balances just in case customers have difficulty getting their payments through. So the custodians of the world economy, the central banks and the financial ministries, will have to rely more than usually on guesswork. Add in the additional activity this year and the fall-back next and it is going to be very difficult to know how serious the ultimate impact on the economy will be.

That is surely the greatest danger of all - that there will be policy errors which will be hard to rectify. From a micro, hands-on, point of view the most obvious danger is a physical catastrophe, such as an aircraft falling out of the sky.

From a macro point of view the most obvious danger is a failure of global economic policy - the wrong response to what turns out to be wrong data. And we won't know it has happened until after it has happened.

If that sounds rather bleak, remember that market economies are self- healing. They can recover from bad economic policies. The world economy continued to grow through most of the 1970s, despite the surge in global inflation and despite two oil shocks.

The outlook may be for a more difficult period in the first years of the next century, but it is hard to see anything more serious than, say, the early 1990s downturn, and maybe nothing as serious as that.

The trouble is that even thoughtful and intelligent policy makers are finding it hard to accept that the present growth phase might ever end. You do not need to buy the extreme "the millennium bug will lead to a global recession" view to acknowledge that negotiating our way around it will be tricky. The millennium comes at an awkward time; pity we couldn't put it back a year or two.