An Unbalanced Global Economy

Growing signs of weakness abroad

For many months now, the red-hot U.S. economy has surprised both foreign observers and the American economics profession itself--growing more rapidly than even the most optimistic forecasters thought possible and providing vital support to an ailing global economy in the process. Meanwhile, economies overseas have repeatedly failed to match downwardly revised projections of groups like the International Monetary Fund.

The question troubling economists these days is how long this situation can last. While most have raised their forecasts of U.S. growth this year, few expect it to approach the heady pace of 1998. Instead, many expect that a moderating U.S. economy will be offset by a gradual upswing overseas. The problem is that there is scant evidence that foreign economies--in Europe, Japan, or elsewhere--are picking up steam, and a lot that they are weakening.

Economist Edward Hyman of International Strategy & Investment Group, who regards industrial commodity prices as the most sensitive indicator of global economic conditions, notes that they just hit a 12-year low and are still plunging (chart). "The clear message is that rapidly slowing growth abroad is more than offsetting the U.S. boom," he says.

With non-Japan Asia accounting for 65% of global demand growth for industrial commodities in the early 1990s, the ongoing price slide underscores the fact that most Asian economies are still contracting. But falling prices are also taking an increasing toll on commodity exporters, from oil producers in the Middle East and Latin America to copper producers like Chile.

Indeed, Hyman notes that a growing number of economies are either in recession or have been posting negative growth recently--including not only Japan, Brazil, Russia, and most Pacific Rim nations but also Germany, Norway, South Africa, Mexico, and most of South America and Eastern Europe. At the same time, Great Britain's economy was flat last quarter and is widely expected to slip into at least a mild recession.

Economist Edward Yardeni of Deutsche Bank Securities Inc. thinks the odds now favor a recession developing in Europe later this year. Export-led growth in 1997, he notes, has been replaced by export-led weakness and sagging industrial production in a number of countries, including Italy, France, Germany, and Great Britain.

Surprisingly, few economists seem to believe this threatens the U.S. expansion--yet. Policymakers overseas are widely expected to stimulate their faltering economies before long. And Hyman points out that weakness overseas could actually bolster U.S. growth, as it has in recent years.

Excess capacity abroad and cheap imports, he notes, helped drive down inflation and thus pushed up U.S. real incomes. And falling inflation pushed down interest rates--fostering the stock market surge and fueling consumption, housing, and investment booms.

"If we're lucky," says Hyman, "we'll see more of the same this year--growth above 3% and even lower inflation." But that, he adds, assumes that the protracted slowdown in foreign economies does not turn into something far worse.

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