Sagging world economy perks up

The US economy isn't roaring by itself any longer.

In recent months, much of the rest of the industrial world has joined in singing a faster-growth chorus. Positive signs are everywhere, from a record-low jobless rate in Britain to surging car sales in France and a 25 percent rise in Japan's stock market.

It's not clear how long such good news will continue. Some experts think Japan, for instance, still has big economic problems.

World economic recovery could be a mixed blessing for the United States. Cheap imports from hard-pressed foreign producers have helped keep US inflation in check.

But better business prospects in other countries equal better export possibilities for American firms. And more generally, all developed nations benefit when the world financial system is stable and predictable.

"We would really like the rest of the world to grow even faster than predicted. The US benefits when the rest of the world grows," says Catherine Mann, a senior fellow at the Institute for International Economics here.

The recovery in the world economy sneaked up on many analysts. Until recently, negative factors such as Germany's economic doldrums and the continuing effect of the East Asian financial crash of 1997 had kept many nations mired in recession.

Now more good news arrives every day.

French authorities, forecasting stronger growth for 2000, have outlined a package of proposed tax cuts and promised that the government's fiscal deficit will drop by 50 percent next year.

Last week, Britain announced a 4.2 percent unemployment rate - the lowest in a generation.

Germany remains hobbled by high social-spending costs but should benefit from the strength of its neighbors and see 2.2 percent real growth next year, according to a Merrill Lynch report.

"We are confident that European growth has reached a turning point and is heading up," concludes the study by Merrill Lynch international economists.

In Asia, $30 billion worth of International Monetary Fund (IMF) aid has stabilized the economies of hard-hit nations such as Thailand and Korea.

Even Japan, the world's second largest economy and a major factor in any global economic recovery, has seen some real output growth. Steel production grew over 5 percent in the year ending in July - the first such rise in almost two years.

The world economy overall will grow 3.5 percent in 2000, predicts Merrill Lynch. That may not seem like much, especially considering that the average global growth in gross domestic product between 1978 and 1998 was 4 percent. But it's a rosier scenario than seemed possible only a few months ago.

"The worst of the [world financial] crisis seems well behind us, with most of the Asian crisis countries recovering fast ... and even the Russian economy doing better than expected," said Stanley Fischer, first deputy managing director of the IMF, at a press conference earlier this month.

Back in the United States, where a gravity-defying economy has begun to produce benefits for even the lowest-income workers, the question is: What does all this mean for us?

After all, the US has been pulling the train of the world economy by itself, metaphorically speaking, throughout the late 1990s.

Just look at the current account deficit - the broadest measure of the amount of money the US sends overseas for foreign goods and services. That figure was $80.7 billion last quarter, a record. That works out to about $1 billion dollars' worth of US greenbacks flowing out of the country every day.

That outflow causes no real problems as long as foreigners turn around and reinvest those dollars in the US - as they have been doing. But as the rest of the world recovers, investment opportunities elsewhere look better and better. Money starts to flow in other directions.

That is happening already in Japan. The yen has been strengthening sharply against the dollar - meaning the world money managers think Japan may now be a better place to put their currency.

If the trade deficit stays in the stratosphere, eventually US interest rates may have to rise to attract dollars back. That could spark inflation, or tighter monetary policy by the Federal Reserve, and lower growth.

"This could cause us big trouble in two or three years," says Ms. Mann of IIE.

There is also the question of whether the rest of the world's relative prosperity will last.

Some experts think Japan's recovery may be illusory, the result of a central bank simply pumping money into the domestic business coffers.

Europe, for its part, still has many structural economic weaknesses. Nations remain saddled with relatively high burdens of social spending and labor inflexibility. Outside of Great Britain, many European nations still have double-digit unemployment rates.

And some parts of the world haven't joined in the general recovery. Parts of Latin America, such as Colombia, are still mired in stagnant or slow business cycles.

(c) Copyright 1999. The Christian Science Publishing Society