Building toward a Worldwide Recovery
As the U.S. economy has struggled to recover over the past 21 months, weak global demand has been like a ball and chain holding it back. Foreign companies, faced with slack demand and overcapacity at home, have flooded the U.S. with imports. And U.S. exporters have had a tough time making much headway overseas. Put the two together and foreign trade has subtracted some two-thirds of a percentage point off annual U.S. growth since the economy bottomed out in the fourth quarter of '01. That may not seem like much, but it has been enough to keep the U.S. economy from attaining the sort of cruising speed necessary to generate more jobs and put the recovery on a sustainable flight path.
Now, though, the global economy looks to be turning. In a forecast prepared for its annual meeting in Dubai on Sept. 23-24, the International Monetary Fund (IMF) predicts that world economic growth will accelerate to 4.1% next year from 3.2% this year and 3% in 2002. Much of that, of course, is due to stronger demand in the U.S. Some economists now see growth of close to 6% in the third quarter, thanks to tax cuts, a boost from defense spending, and stepped-up capital investment.
The global upswing, though, is not only a made-in-the-USA affair. Japan, the world's second-largest economy, is picking up and starting to generate homegrown growth, rather than just relying on exports for a boost. Emerging economic powerhouse China has shaken off the SARS scare and is on a tear, with sales of everything from autos to construction materials booming. Even in Europe, where the economy all but stalled in the first half, there are signs of life, with business confidence starting to perk up. "We are not out of the woods, but we are clearly in a better situation than earlier this year," IMF Managing Director Horst Köhler said on Sept. 12.
The broadening of the global expansion bodes well on many fronts. Global trade talks in Cancun broke down on Sept. 14 in part because the weakness of the world economy made it difficult for the U.S, Europe, and developing nations to make concessions. Faster growth and increased prosperity don't guarantee that the talks can be restarted next year, but certainly increase the chances they may be.
More concretely, the global upswing should help hard-pressed U.S. manufacturing companies. Still hemorrhaging jobs, they remain a weak link in the economic recovery. "We're starting to see business levels improve," says Theodore Solso, chief executive of Cummins (CUM ) Inc., a maker of big engines based in Columbus, Ind.
Indeed, U.S. exports are on the rise and hit their highest level in more than two years in July. Part of that gain, of course, has been due to the weakening of the dollar over the past 18 months, which has boosted the competitiveness of U.S. companies, particularly vis-à-vis their European rivals. In a bid to give manufacturers a bigger lift, U.S. Treasury Secretary John W. Snow is expected to press both China and Japan at the IMF meeting in Dubai to allow their currencies to appreciate against the dollar. While China is unlikely to agree, traders are betting that Japan may be more amenable.
Stronger overseas demand, coupled with a lower dollar, is even raising hopes that the relentless rise of the U.S. trade deficit may be nearing an end. True, a further increase in red ink seems likely in the coming months as the supercharged U.S. economy sucks in more imports. But some economists are forecasting the deficit will crest next year, at least as a percentage of gross domestic product. "The current-account deficit will peak over the next year and hopefully head down in 2005," says former IMF chief economist Michael Mussa.
Admittedly, the widening recovery is only the first step toward a needed rebalancing of global demand. It will probably take a further fall of the dollar, and even faster growth abroad, to wean the world economy off its over-dependence on the U.S. "The path to a more balanced global economy will require further [action]. But this [expansion] is an important step," says J.P. Morgan Securities economist Bruce Kasman.
It's a step policymakers can claim some credit for. After all, they've pumped massive amounts of money into their economies. "We haven't had such a flood of liquidity since the time of Noah," quips Robert D. Hormats, vice-chairman of Goldman Sachs International. The U.S. has led the charge by slashing income taxes and reducing short-term interest rates to their lowest level in 45 years. But countries from South Korea to Germany have also cut taxes while central banks worldwide have opened the monetary spigots.
The global growth strategy is beginning to pay off. Japan's long-troubled economy grew faster than that of the U.S. in the second quarter. Most of that growth came from stronger domestic demand. Forced to live with debilitating deflation over the past six years, Japanese multinationals have slashed costs and boosted efficiency. And despite ongoing problems in Japan's banking system, corporate profits are rising and businesses are using that money to step up investment. Capital spending was up more than 5% in the second quarter.
U.S. companies are beginning to reap the benefits. "We're starting to see significant improvement [in Japan]," says Network Appliance (NTAP ) CEO Daniel J. Warmenhoven. Adds Cisco Systems (CSCO ) CEO John Chambers: "It's the most optimistic I've seen Japanese business and government leaders...in a decade." Japan and much of Asia are benefiting from strong demand in China. While China has a growing and controversial trade surplus with the U.S., it's deeply in the red to the rest of Asia. Indeed, China looks set to supplant America as South Korea's top export market.
And thanks to an aggressively expansionary monetary policy that has boosted the money supply by 20% over the past year, Chinese demand is booming after a SARS-induced hiccup. In Beijing, restaurants are crowded again and it's hard to get taxis. After slowing in June, retail sales rose at a year-over-year rate of nearly 10% in August. Sales of automobiles have jumped an astounding 60% and could hit 2 million units this year.
In contrast to Asia and the U.S., Europe still lags behind in the growth game -- in part because policymakers there have been more timid than their U.S. and Asian counterparts in trying to stimulate demand. There are signs, though, of better times ahead. In Germany, manufacturing is starting to pick up for the first time in months. And in France, new business creation is robust. "It's not all gloom," says Michael Heisse, chief economist at the Allianz Group financial-services firm. "There has been significant corporate restructuring and profitability is improving."
What's more, European politicians are finally beginning to press ahead with the painful reforms needed to boost efficiency and long-term growth. Against a grim backdrop of rising unemployment, German Chancellor Gerhard Schröder looks set to carry through on much of the pension and labor market reform program he unveiled in March. That's raising hopes for stronger growth in Germany, Europe's largest economy. Traditionally, German recoveries have followed an increase in exports. But this time, says Udo Rosendahl, portfolio manager at European money manager DWS, corporate investment and consumer demand will lead the way.
That's music to the ears of U.S. policymakers. For years, they've been warning America's trading partners against relying on exports for growth and prodding them to develop some internal demand of their own. Now, there are signs that's happening. That's good news -- both for the U.S. and world economies.
By Rich Miller in Washington with David Fairlamb in Frankfurt, Brian Bremner in Tokyo, Dexter Roberts in Beijing, and bureau reports