World's economies try to stay aloft in US downdraft

It's not just the United States economy that's in trouble. It's the world's.

For six years or so, the thriving US economy was the center of demand for goods from around the globe. Last year, it sucked in $360 billion more of imports than it exported. Now the American economy has slowed sharply.

"It's not good for the world economy," says Clyde Prestowitz, president of the Economic Strategy Institute in Washington.

Indeed, there is a scramble in several countries to avoid, if possible, the drag from the slowing US economy.

The Bank of Canada, for instance, last Wednesday reduced a key interest rate from 5.75 percent to 5.25 percent, after a quarter point cut in January. Canada ships about 85 percent of its exports to its southern neighbor.

A day later, Australia's central bank reduced its benchmark interest rate for the second time in four weeks. It, too, is attempting to ward off a slump.

Also, China, which exports heavily to the US, rolled out a budget last week that is $31 billion in the red. A boost in public-works and military spending is partly aimed at generating a 7 percent growth rate this year after inflation.

Other central banks that cut rates last month include South Korea, the Philippines, Hungary, Denmark, and Turkey. Turkey acted after sinking into a financial crisis.

Global output this year will still grow 2.6 percent after inflation, reckons Consensus Economics in London. The firm uses predictions of more than 200 forecasters around the world to come up with its consensus forecast, weighted by the size of national economies.

That forecast indicates "an unusually large drop" from 3.9 percent real growth in the world in 2000, says editorial director Jeremy Weltman. He expects a further drop in a monthly poll taken this week.

The US is the biggest factor in the world slowdown because it produces 20 percent of global output. The latest Federal Reserve survey of regional economic conditions shows business activity has slowed to a crawl in some areas.

Europe is offering the largest positive influence on the world. Though slowing a little, the European economy is still expected to grow a healthy 2.6 percent this year. Because European countries do most of their trade with each other, Europe's economy is relatively independent of US trends.

"At present there are no convincing signs that the slowdown in the US economy is having significant and lasting spillover effects on the euro-area economy as a whole," Wim Duisenberg, president of the European Central Bank, told the European Parliament last week. The ECB expects just under 3 percent growth in the 12-nation eurozone this year and next.

Another big drag on the world economy besides the US is Japan. Its economy is again faltering. The consensus forecast for Japan this year is for a mere 1 percent growth, notes biz4casts.com, another gatherer of economic forecasts, based in White Plains, N.Y.

Last month the Bank of Japan cut its charge for overnight loans to 0.15 percent from 0.25 percent, reversing a tighter monetary policy move last August. Governor Masaru Hayami last week told parliament that the bank is considering easing credit further, perhaps by buying government bonds, to revive the economy.

As usual, forecasters of the world scene differ. Stephen Roach, chief economist of Morgan Stanley, a New York investment firm, sounds pessimistic. He sees "negative accelerator" effects as "a major source of instability to the global business cycle."

One such factor is a deceleration in world trade from 12.4 percent growth in 2000 to a forecast gain of only 5.9 percent this year. "The sharpest slowdown on record," notes Mr. Roach.

Another factor is the "dramatic about-face in the US information technology cycle." IT spending rose 23 percent last year. Morgan Stanley analysts talk of zero growth in IT in the months ahead.

J. Paul Horne, a London economist for Salomon Smith Barney, counts himself as an optimist for the world economy. He expects the Fed to drop interest rates "by whatever it takes" to bring about an economic recovery in the US.

Despite contrasting tones, both he and Roach forecast world GDP growth of 2.8 percent this year.

What can be done to keep the world economy bustling along?

"We need people to start spending like they are rationally exuberant," says Mr. Horne.

Most economists want the Bank of Japan to step on the gas.

One encouraging note is that forecasters around the world see a better economy next year. Nine of 10 major industrial economies should pick up speed in 2002, says Alan Teck, chairman of biz4casts.

(c) Copyright 2001. The Christian Science Monitor