Sun Over Europe, Clouds Elsewhere

The presidency of George W. Bush begins under cloudy skies for the economy. Many forecasters now say the U.S. is already in recession or heading there, and that its slowdown will weaken the global economy.

Even so, nothing seems certain. Optimists and pessimists debate the downturn’s duration, with some economists saying a recovery will begin by July, buoyed by surprisingly strong consumer spending.

But amid economists’ confusion, average investors and businesspeople can take reassurance--and get hints about the world’s real prospects--from the way pension and mutual funds are taking the long view and calmly allocating capital around the world.

The message is that global recession won’t happen, no matter the dark clouds today.

Investments continue to flow to Japan, for example, even though many analysts fear the world’s second-largest economy is retreating once more into recession.

Europe is the favored prospect this year because the industries of Germany, France, Italy and other countries will enjoy the effect of tax cuts and loosened regulations.

Europe lagged as the U.S. boomed in the last decade because high taxes and rigid regulations hobbled the Continent’s economies. Now taxes are coming down. Germany is lowering individual income taxes from top rates above 60% to rates of 45% and below, and corporate taxes are coming down from 40% to 25%.

Labor laws that unintentionally discouraged hiring--and led to double-digit unemployment in major European countries--are being relaxed. Independent contract work and temporary work for skilled trades and professions are on the rise. That portends a rise in productivity, experts say--the gains in output per hour of labor or unit of investment that have propelled the U.S. economy in the last five years.

“European business skills are underestimated,” says Stephan Richter, head of Transatlantic Futures, a Washington-based economic and political research organization. “The fact that managers in Europe were able to show profits at all with their hands tied by regulations means they’ll be impressive as restrictions are lifted.”

Others who study Europe concur. Scott Weiner, a partner at Payden & Rygel, a Los Angeles investment firm with ties in Germany, notes that consumers in Europe are gaining confidence as unemployment comes down to levels of 9% in Germany and France--from peaks of 11% in recent years.

Also, European governments are amending tax laws to allow the equivalent of 401(k) plans so that employees can invest for retirement. The increase in individual investing will boost European stock markets. And big institutional funds are already putting money into stocks and bonds denominated in euros.

The euro, which has risen almost 15% against the dollar in recent months, may well rise further, Weiner says. Average investors can invest in euro-denominated stocks and bonds through mutual funds sold by Brandes Investment Partners of San Diego, Fidelity Investments and other firms.

Also, many European companies list shares denominated in dollars in U.S. markets--particularly as they have acquired U.S. companies.

Nestle of Switzerland’s $10-billion bid last week for Ralston Purina, the St. Louis-based pet-food giant, is an example of a global company selling shares in U.S. markets.

Royal Ahold, the worldwide supermarket chain based in Zaandam, the Netherlands, is another example. Ahold owns supermarkets on four continents, prominently in Brazil and Thailand. In the U.S., Ahold owns Giant, Stop & Shop and other chains.

The outlook for Asia is gloomier than that for Europe, mainly because of worries about Japan. The Japanese economy remains flat, despite years of government spending on public works that were aimed at boosting economic growth.

Now it looks as if Japan’s long-running restructuring will take two to five more years, says Richard Ellings, president of the National Bureau of Asian Research, a Seattle organization set up by the late Sen. Henry Jackson to foster knowledge of Asia.

Slow economy notwithstanding, capital continues to flow into Japan, says Mark Sullivan, Asia-Pacific director of PricewaterhouseCoopers, which represents U.S. and other foreign companies investing in real estate and small-to-medium-size companies in Japan.

What such foreign investors see is an undercurrent of economic reform and technological innovations that go on despite the stalled economy. And they note that the Japanese people have enormous savings--almost $1 trillion worth--in the Postal Savings System. Some of those savings will be paid out this year to individuals who will use the money to invest at home or in other countries through the new 401(k)-type accounts established only last year by the Japanese legislature.

It may take five years and a fight to overcome resistance in some government and business circles, but “eventually Japan’s economic revolution will succeed, because it will bring jobs,” says Diana Helweg, a professor at Southern Methodist University who heads a Council on Foreign Relations task force on Japan’s economy. Unemployment in Japan, which scarcely existed in the long decades of lifetime job security, has risen to a post-World War II record.

All of Asia needs Japan’s huge economy to revive and be an engine. Failing that, Asia depends more than ever on the U.S. economy. China sends 28% of its exports to the United States, for example; last year, it ran up a $77-billion trade surplus. South Korea sends 22% of its exports to the U.S.

If the U.S. economy went into prolonged downturn, it could indeed bring on a global recession.

Fortunately, there are other factors in the outlook. Asian countries (aside from Japan) have huge savings, notes analyst Andy Xie of Morgan Stanley Dean Witter’s Hong Kong office. Xie puts the total at $200 billion. That money needs to be employed in business investments, not sitting idle, Xie says. It needs a growing U.S. economy to absorb Asian goods and inspire enterprise.

And that is where U.S. consumers come in. Consumers will gain confidence as interest rates decline. The Federal Reserve lowered rates Jan. 3 and is likely to lower them again Jan. 31, analysts say.

Tax cuts will be pushed by both parties to reverse the current slowdown, and that will put more money in consumers’ pockets. Their spending will boost the U.S. economy and therefore the global economy.

“Betting on a prolonged recession is tantamount to betting that the Fed’s easing won’t stimulate consumer spending,” says economist Edward Yardeni of Deutsche Bank. “I would rather bet on both the Fed and consumers.”

Overcast today, sunnier tomorrow is the forecast.

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James Flanigan can be reached at jim.flanigan@latimes.com.