Economic Rebound Abroad a Boon to U.S.
Just two years ago, a humming U.S. economy served as the lifeboat for entire regions of the world that seemed to be drowning in a sea of financial turmoil.
Jump ahead to spring 2000 and a strikingly different picture emerges: Now, it is America’s economic expansion that is showing hints of weariness, while many other nations bask in a vibrant comeback.
In a noteworthy role reversal, analysts say, stronger economies overseas and a boost in American exports may help offset today’s somewhat weaker U.S. domestic climate in the coming months and even beyond. What is more, much of the emerging world is now considered healthy enough to swim on its own without a critical pull from American consumers.
“The very good news for the U.S. is that worldwide we’re in a recovery phase,” said Kurt E. Karl, international economist with the WEFA consulting group near Philadelphia. “Though there are a few countries with problems, there are no [entire] regions with problems. Europe is doing well. Asia is coming back really, really strong. Latin America is coming back. Even Russia is doing well.”
“It means,” he added, “that a slowdown in the United States economy is not a killer for the world economy.”
The shifting economic tides have significant meaning for consumers. They have emboldened the Federal Reserve to push up U.S. interest rates to fight inflation at home without fear of causing great harm abroad. Beyond that, awareness that growth prospects overseas are comparing more favorably with those in the United States has started to weaken the value of the dollar, a potentially far-reaching development.
Economists are generally sympathetic to such a shift, because a weaker dollar could help narrow the U.S. trade deficit, albeit slowly, by reducing the overseas price for American products while pushing up the cost of foreign products in this country. The export gains, already being reported, could create jobs that might not otherwise be generated in a slowing U.S. economy.
“Strong growth elsewhere will help cushion the slower growth in the United States,” maintained Nariman Behravesh, chief international economist at Standard & Poor’s DRI, a private consulting firm in Lexington, Mass. “In that sense, it’s a good time for the Fed to raise interest rates.”
Clearly, all agree that a sharp U.S. slowdown could spread pain at home and damaging fallout in a closely connected world economy. Some analysts emphasize the dangerous possibility that the United States could face a simultaneous plunge of the dollar and the stock market, rather than more gradual declines. Such a one-two punch could radiate globally, shaking world financial markets and perhaps even hurting the fragile emerging economies that today seem embarked on solid recoveries.
Few Experts Foresee an Economic Crisis
“There seems to be a widespread perception that the global economy now stands on the brink, but the brink of what remains the question,” declared the Bank for International Settlements, which serves the world’s central banks, in a report earlier this week.
For now, however, few experts are predicting a crisis. Rather, many economists believe that the U.S. economy, which expanded at a fast 5.4% pace in the first three months of this year--after its feverish 7.3% surge in late 1999--is in the process of slowing toward a more sustainable cruising speed of 3% to 4%.
Elsewhere, economists point to an increasingly stable economic landscape. Across the Atlantic, the economy of the 11-nation zone that has embraced the euro currency could expand 3.4% this year, according to European Commission forecasts, which would be the swiftest pace in a decade.
Japan remains the noteworthy laggard among giant economies. It seemed to rally earlier this year but the outlook remains precarious, economists say.
Japan’s neighbors are enjoying a very different situation, however. Key economies in Asia, which seemed to be struggling against chaos just two years ago, now are booming in the range of 6%, with once-beleaguered South Korea expected to grow even faster than that.
Moreover, these recoveries are viewed as self-sustaining; they no longer rely on exceptional levels of demand from the United States for their goods. In a dramatic change from the worries of the recent past, some analysts now wonder whether the global economy could absorb energetic recoveries in all regions without running short of materials and unleashing inflationary pressures.
“The world doesn’t need the supercharged growth pace that the United States has had for the last few years,” said James Glassman, an economist with Chase Securities in New York.
In part, the U.S. economic boom was fueled by the Fed, which pushed down U.S. interest rates on three separate occasions in late 1998 to stabilize a global financial system that had been stunned by crises in Asia and Russia.
The Fed actions had an unintended side effect, however: The lower rates acted as high-powered fuel for the U.S. economy, encouraging people to buy houses and cars, stimulating employment and elevating consumer confidence to lofty heights. Thus American consumers helped much of the world economy stay afloat; by absorbing a barrage of imports, they boosted factories overseas that produced everything from dishware to apparel to consumer electronics.
A legacy of that episode is the gigantic U.S. trade deficit--$338.9 billion by its widest measure. A strong dollar helped pay for that spending spree. At the same time, weaker currencies helped foreigners compete against American exports, both in the hard-hit developing world and in Western Europe.
Aided by a weak euro that held down their prices on world markets, European exporters captured sales of high-tech equipment “largely at the expense of American exports,” according to an analysis by Mallika Ishwaran, a scholar at the Jerome Levy Economics Institute in New York.
But now, increasingly buoyant foreign countries are expected to stock up more heavily on American items, and key currency relationships are starting to shift. Indeed, there are early glimmers that such forces are at work.
When the European currency hit its bottom against the dollar in early May, it took just 88 cents to buy a euro. But an array of signs, ranging from stronger industrial sectors in Germany and Italy to an improved jobs outlook in France and Spain, have bolstered Europe’s currency.
By this week, it took more than 95 cents to buy a euro--and at one point following Thursday’s fifth European interest-rate hike in seven months, the currency rallied above 97 cents.
Strong Overseas Markets Aid Exporters
“Strong growth overseas means stronger [U.S.] exports,” Behravesh said. “It’s part of the answer to bringing the trade deficit back into line.”
U.S. exporters, meanwhile, are reporting sharp gains. In 1998, U.S. exports overall barely kept up with the prior year, and many sectors fared worse, reflecting severe fallout from the Asian financial crisis, according to data from the National Assn. of Manufacturers. This year, amid increased economic vitality around the world, U.S. exports are forecast to increase 6%.
Next year, the gains could reach 10%, said David Huether, director of economic analysis at the Washington-based association. But some regions are already benefiting from big gains in overseas business.
For example, California exports jumped an extraordinary 17.5% in the first three months of the year, driven by increased sales to Mexico, Japan, Canada, South Korea and Taiwan, according to an analysis by the Massachusetts Institute for Social and Economic Research, a state-funded organization affiliated with the University of Massachusetts at Amherst.
If higher U.S. interest rates succeed in restricting domestic business activity, as the Fed intends, the global economy may provide a significant offset. “If you have exports beginning to gain when domestic activity is starting to slow, it makes economic growth more stable,” Huether explained.
