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Hopes Rest on U.S. to Lead World Recovery

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TIMES STAFF WRITER

With cuts in jobs and rock-bottom interest rates spreading like viruses, the ailing global economy greets the new year in its most fragile state in more than a decade.

Most countries are looking for something to lift them out of their recessions, and their eyes are firmly fixed on the United States. This year, the world got a glimpse of a life with a recession-wary American consumer, and it was not a pretty sight.

As purchasing fell and the wheels of commerce slowed, manufacturers in the United States, Canada and Mexico laid off hundreds of thousands of workers. Asia’s tech-dependent economies shuttered factories after the tech bubble burst. Even prosperous Scandinavia was forced to tighten its belt as the U.S. recession crimped exports of Norwegian oil and Swedish mobile phones.

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Although there are some bright spots, such as China, the global economy next year is projected to post its slowest rate of growth in eight years.

If there is an upside, it is the hope that a recovering U.S. economy will pull the rest of the world out of the trough by the end of next year or early 2003--but that optimism would be easily shattered by another terrorist attack or any escalation of the Middle East conflict.

One thing is certain: The U.S. is the only country with the fiscal firepower to jump-start a $30-trillion-dollar global economy.

“There is no question the U.S. is the engine of global growth and U.S. consumers are at the core of that equation,” said David Resler, chief economist for Nomura Securities in New York.

Not everyone is sure skittish Americans are ready to ride to the world’s rescue, even with the lure of cheap money and patriotic calls by President Bush to shop until it hurts. Stephen King, chief economist for London-based HSBC, believes predictions of a V-shaped U.S.-led global recovery are too optimistic, given America’s high level of debt and large inventories of capital goods.

“If you’ve got excessive levels of debt, it doesn’t matter whether interest rates are at 6% or 1%, you’ve still got too much and you’re not keen to borrow more,” King said.

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After watching major U.S. retailers halt their holiday imports at least two weeks earlier than usual, Guy Fox, the chairman of Redondo Beach-based Global Transportation Services Inc., is pessimistic about a quick rebound. He estimates holiday shipments were down by at least 10% and air freight plunged by half since the Sept. 11 terrorist attacks. Firms around the world are reluctant to order U.S. goods, as they are still assessing the costs from added security and increased risks.

“It’s going to be a tougher year,” he said. “We’re going to work a lot harder for the dollars we made this year in order to be on an even keel.”

The U.S. recession and post-Sept. 11 slump, particularly in air transportation and tourism, have been painful reminders to many of the dangers of tying their fortunes too closely to the world’s largest economy.

In Mexico, which sends 90% of its exports to the U.S., officials are seeking trade pacts with Europe and Japan. The Singapore government is reexamining its dependence on sales of electronic components to U.S. computer makers. European officials, who thought they could escape the U.S. slowdown, hope the Jan. 1 launch of their new currency, the euro, will facilitate trade within the 12-country region where currency exchange was a costly nuisance.

“It’s an old message in a new form,” said Fred Bergsten, director of the Washington-based Institute for International Economics. “It’s a reminder that putting all your eggs in one basket, either sectorally or geographically, is risky business.”

The downturn in the tech sector has led Singapore--facing its worst recession since gaining independence in 1965--and its Asian rivals in South Korea, Taiwan and Malaysia to rethink their dependence on the U.S. Over the last decade, these countries competed aggressively to become the suppliers for U.S. technology firms such as Intel, Gateway and Dell.

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Now, with their economies growing slowly if at all, they are negotiating trade pacts with Japan, Latin America and Europe and have renewed efforts to create a free-trade zone within Asia. Among Japanese companies, Toshiba, which is exiting the memory chip business, announced this month it is selling a chip plant in Virginia.

But don’t expect a major shift in Asia away from the U.S., given America’s powerful allure as the world’s largest consumer market and center of entrepreneurial activity. For example, most Japanese investors are keeping their U.S. assets and in some cases are taking advantage of low prices to expand their American operations, according to Kei Matsuda, chief economist for Union Bank of California.

“Especially if you’re selling consumer goods, the U.S. still looks like a very attractive market,” Matsuda said.

One of the world’s biggest economic sore spots is Japan, where Prime Minister Junichiro Koizumi’s ambitious economic restructuring plans have been bogged down amid political infighting. Almost daily, the country’s currency, the yen, hits a new low.

As the country slides even further into recession, the pace of layoffs and bankruptcies will accelerate, placing more pressure on a financial system in which more than half the banks are technically bankrupt, according to Bergsten. If one or two of Japan’s biggest banks go under, it could spark a global liquidity crisis as the world’s largest creditor nation brings its money home to pay its bills.

“You could have one big source of international lending gone all of a sudden in a short period of time,” Bergsten said.

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Economist Matsuda believes Japan can still contribute to a global recovery as long as it doesn’t slide much further into the red. As a sign of strength in the Japanese economy, he said, California’s exports to Japan, its second-largest market, dropped less for the first nine months of 2001 than in the previous year.

Another country high on the sick list is Argentina, which has said it will no longer make payments on $132 billion of foreign debt. Argentina will be issuing a new currency, called the argentino, to pay government workers and some pensions. But the argentino is essentially an IOU, and whether it will be accepted at the same value as the peso and the dollar is unclear. If it isn’t, it could drag down the value of the peso or ignite a round of inflationary price hikes.

Also on the sick list are Turkey and Indonesia, where civil unrest and a backlash against the U.S.-led war on terrorism have scared away foreign investors.

Bergsten and others remain confident that even a weakened U.S. economy, with help from Europe, can prevent any of these troubled economies from pulling the world into a depression. But after revising its global growth estimates for 2002 to 2.4%, the slowest pace in eight years, the International Monetary Fund urged officials to consider deeper cuts in interest rates and increased aid for the poorest countries.

“This is a period still of greater-than-usual uncertainty,” said IMF chief economist Kenneth Rogoff.

Even Western Europe, which conducts the bulk of its trade within the region, faces a bleak year. Sweden, Norway, Denmark and Finland, four of the richest countries in the world, have slashed interest rates but are still slowing to a crawl, with Finland falling into recession this year. The European Central Bank recently halved its 2002 growth forecast for the euro region to 0.7% to 1.7%.

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The Jan. 1 introduction of the euro currency is expected to speed up regional integration, but Europe could fall further behind unless officials take more steps to encourage cooperation across borders, according to Don Straszheim, president of Straszheim Global Advisors.

“There’s a real question whether European officials will allow countries within the EU to compete with each other with reforms that make the economy more efficient,” he said.

As America’s fiscal woes continue, its closest neighbors--Canada and Mexico--will bear the brunt of their close ties to the U.S. North America will be the slowest-growing region in the world in 2002, followed by those regions with strong trading links to the U.S.: Western Europe, Asia and Latin America, according to the Economist Intelligence Unit, a research arm of the Economist magazine.

Countries with large, protected domestic markets or limited exposure to America’s woes are expected to show the strongest gains in 2002, though in some cases from a low level. They include China, India, the former Soviet republics and some countries in Africa. For example, the tiny West African nation of Equatorial Guinea, which boasts a per-capita income of $2,000, is expected to record a 34% growth rate next year thanks to increased foreign aid and additional oil production.

China’s exports to the U.S., its largest customer, have recently slowed, but the world’s most populous nation still is expected to maintain 7% growth, helped by massive government investments and foreign cash.

The Asian giant’s long-awaited entry to the World Trade Organization has accelerated painful reforms, including closing unprofitable state-owned enterprises and lifting barriers that protect farmers. It also has created lucrative opportunities for foreigners in insurance, retailing and telecommunications.

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Other Asian economies fear that when the world outlook starts to improve, China’s low-cost manufacturers will grab a disproportionate share of the business.

“China can act as a small engine [for the global economy] or it can be a serious competitor,” said Chan Heng Chee, Singapore’s ambassador to the U.S.

For a multinational firm such as Boeing, China offers a rare glimmer of hope. While others were scrambling to delay or cancel aircraft orders after the September attacks, China placed a $1.6-billion order for 30 Boeing 737s to upgrade its fast-growing domestic fleet. China, the largest foreign commercial aircraft market, is expected to buy $144 billion worth of airplanes over the next 20 years.

Nonetheless, Boeing’s 2002 delivery schedule has been cut from as many as 520 planes to as few as 350, and 2003 is expected to be even worse.

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