A Stronger Dollar Has Americans Dreaming Of EuropeGene Koretz
While the yen's newfound strength against the dollar has made headlines in recent weeks, another currency shift is only now starting to draw attention: the remarkable resurgence of the greenback in Europe. After hitting a record low against many European currencies in the middle of last year, the dollar rose significantly last fall when the European exchange rate mechanism (ERM) began to unravel. And it has continued to trend higher as the U.S. economy has gathered steam and as interest-rate cuts in Europe have narrowed the gap between U.S. and European rates.
The upshot is that in many European countries, the dollar is now the strongest it has been in recent memory, and in Italy, Britain, Finland, and Greece, it's actually at its highest level since 1986. Prospective American tourists are watching with glee. According to a survey of travel agents conducted in early March by Travel Weekly, an industry publication, inquiries and bookings of summer trips to Europe have increased markedly in the past month.
The European Travel Commission reports that a new nationwide consumer advertising campaign stressing affordability is attracting as many as 3,000 phone calls a day. "The number of U.S. travelers to Europe this year could surpass the 7.5 million record set in 1990," says an official.
Although dollar appreciation already translates into less expensive hotel rooms and restaurant meals for Americans planning European vacations this year, the bargains could grow even larger. In light of the deepening recession in much of Europe, the slide in European interest rates, and the growing political turmoil in Western as well as Eastern Europe, most experts believe the dollar's upward climb is far from over.
But an influx of U.S. tourists overseas won't help the U.S. economy, particularly since recessions in Europe and Japan have already cut the huge wave of foreign tourists visiting the U.S. in recent years. The U.S. surplus in travel and tourism receipts, which exploded from $3.2 billion in 1989 to nearly $12 billion in 1991, slipped last year and is likely to be down sharply in 1993.
More important, the same syndrome is afflicting the U.S. merchandise trade balance with Europe, which swung from a $21 billion annual rate surplus early last year to a $6 billion deficit in the fourth quarter. With Europe's economic outlook darkening and the expansionary climate in the U.S. brightening, this adverse trade trend will undoubtedly continue. And the high-flying dollar promises to exacerbate the problem.
Until recently, one of the saving graces in the U.S. trade performance has been the virtual explosion in shipments of U.S. goods to Latin America, which accounted for more than half of U.S. export growth last year. Now, however, a marked slowdown in projected growth in several leading Latin nations "is tarnishing the outlook," observes economist Gail D. Fosler of the Conference Board.
Fosler notes that the International Monetary Fund recently slashed its 1993 economic growth projections for Latin America from nearly 4% to just 2%, with big downward revisions for Mexico, Brazil, and Argentina. Plagued by high inflation, soaring imports, and depreciating currencies, most of the major Latin nations are stepping on the brakes.
The situation is particularly acute in Mexico, which accounts for 9% of U.S. exports and is concerned about its ballooning payments deficit. With imports from the U.S. up 27% last year, some observers think the Mexican government could devalue the peso sharply to reduce the import surge after the North American Free Trade Agreement goes into effect later this year. Even if it forgoes such a move, however, the government's tight-money policy already seems to be slowing import growth.
The bottom line is that U.S. export growth to Latin America has moved to a slower track, even as exports to Europe and Japan flag. The big question is whether the remaining bright spot in the U.S. export picture--the newly industrialized countries of Southeast Asia--will be affected by Japan's downturn.
Installment debt is currently down to about 16% of disposable personal income, from 19% in late 1989. But that doesn't mean that consumers will be ready to borrow and spend any time soon, cautions economist Robert Brusca of Nikko Securities Co.
Brusca figures that current interest rates on auto loans and credit cards together average about 11%. He calculates that someone with a median income of around $30,000 and average installment debt of $4,800 is still paying some $528 in interest costs. A wage increase of 3%, or $900, this year, would give that person only about $675 after federal and state taxes--barely enough to cover the interest costs on his or her debt.
"This kind of arithmetic," says Brusca, "explains why people are still paying down debt rather than borrowing more. As long as consumer loan rates are so high and wage growth is so low, it's the best investment they can make."
Homes in the $400,000-and-up class, which took a beating in the recent recession, may experience a significant revival in demand and value as a result of President Clinton's economic scheme. The reason, argues economist Susan M. Hering of Salomon Brothers Inc., is that the dramatic rise in the top marginal income-tax rates will cut aftertax mortgage-finance costs by 5% to 10%. Similarly, the wide differential between the 28% capital-gains tax and the new 36%-plus marginal tax rate will add to the appeal of expensive residences and second homes as investment vehicles.
In sum, says Hering, "the government is giving high-income taxpayers a choice: Send us your dollars, or spend them yourself by purchasing a more expensive home." For many taxpayers, eager to shelter hard-earned dollars, that choice won't be too difficult.