[this article is so odd and so wrong that I'm gonna decosntruct it in a separate email. Mark] As the Ferderal Reserve acts to head off an American recession, Asian countries have reason to hope it succeeds, says Ed Crooks Published: January 5 2001 19:38GMT | Last Updated: January 5 2001 20:02GMT For the best part of a decade, the US has provided the world with a comforting sense of global economic security. While Europe was sluggish, Japan stuttered and emerging markets lurched between boom and bust, the reliable strength of the US expansion was always there to offer reassurance. Between 1997 and 1999 the US accounted for almost half of all the growth in the world economy. But now the US is in danger of turning into a source of instability. Sharply slowing growth, plunging consumer and business confidence, volatile equity and bond markets - and the Federal Reserve's surprise half-point cut in interest rates this week - all suggest the US economy can no longer be counted on to provide a safety net. The fear sweeping through governments and businesses worldwide is that if the world's biggest and recently most successful economy falls to earth, the rest of the world will topple. That fear may be overdone, for even if the US enters a recession, the impact on different regions of the world will vary. Asian economies and others that rely heavily on exports to the US will suffer the most. Japan, already in an enfeebled state, will be weakened once again. But Europe in particular ought to be able to weather the storm fairly well. Last year the world economy recorded its strongest growth for a decade as Europe was boosted by the weakness of the euro, Japan showed fresh signs of recovery and many emerging economies continued their remarkable bounce back from the crisis of 1997-98. But forecasts that this year would show only a modest slowdown seem certain to prove over-optimistic. The International Monetary Fund has admitted that its estimate of global growth of 4.2 per cent is unrealistic. Even the latest market forecasts, compiled by Consensus Economics, the consultancy, of 3 per cent growth in the euro-zone and 2 per cent growth in Japan, now seem certain to be revised downwards. Simulations using the IMF's economic model, published last year, suggest that a fall in share prices that knocked 2 per cent off US gross domestic product would cut 1 per cent from gross domestic product in the euro-zone and Japan. If that happened, it might slow the European economy enough to stop unemployment falling and would yet again defer Japan's hopes of a recovery. Yet even a sharp downturn in the US need not set off a global recession. "We're certainly looking at somewhat slower growth in the global economy but we do not at this point see anything that could be called a global recession. Anything less than 2 per cent growth is an outside risk," says Michael Mussa, IMF chief economist. For all the talk of the US as the engine of the world economy, the economic cycles of America, Europe and Asia have not been particularly closely linked over the past two decades. The economic trends of recent years have had national or regional rather than global causes. The US recession of the early 1990s was principally a result of the Fed's attempts to choke off inflation caused by the over-rapid expansion of the 1980s. Europe's slowdown came later, as Germany bore the costs of unification and European nations imposed fiscal discipline to enter economic and monetary union. Japan slumped after property and equity prices fell in 1990 and has never fully recovered. Signs of a revival in 1996 were snuffed out by a tightening of fiscal policy and the blow to confidence from the Asian crisis. The huge US trade deficit - equivalent to some 1.5 per cent of the rest of the world's output this year - means the US is now a very important for some emerging market countries. Exports to the US provide a quarter of the entire national income of Mexico and Malaysia, 8 per cent for South Korea and 12 per cent for Thailand and Taiwan. The concentration of emerging Asian economies on manufacturing electronics, which helped them recover rapidly after the 1998 downturn, is also likely to mean they suffer badly from a technology industry downturn. Economists at HSBC forecast that South Korea and Malaysia will slow from growth of about 9 per cent this year to less than 4 per cent next year. But for most developed countries, the US market is very far from mainstay of the economy. The euro-zone is relatively closed in global terms, exporting about 17 per cent of its GDP, and the UK is its biggest market. Exports to the US account for 2.6 per cent of Germany's national income and 1.7 per cent of France's. Even adding Europe's modest exports to the emerging economies that might be hit by a US downturn, the total effect on demand is likely to be manageable. With taxes already being cut across Europe, most strongly in Germany and Italy, domestic demand in the euro-zone will be boosted by about 0.5 per cent this year. That would be enough to offset any expected loss of export demand, except in the most severe circumstances. Europe's links with the US through financial markets may be more significant than those through trade. The enthusiasm of European companies for acquiring US assets means that they are more exposed to the US market than before. Partly as a result, movements in equity prices around the world tend to follow the US market. Last year global stock markets fell on US weakness, in spite of the fact that the main worries affecting US markets were domestic. Yet even if US equities fall further, the reaction in Europe may be muted because corporate valuations are less stretched. Historic price-earnings ratios are around 20 in France and Germany, as opposed to 27 for the S&P 500 in the US. European shares lagged the US equity market surge that began in 1995, so they are unlikely to fall so hard. "What seems to be happening in the US is that everything is normalising: equities, the dollar, household savings and the trade deficit," says Julian Callow of Credit Suisse First Boston in London. "But in Europe we have been pretty normal already. So we are less exposed to a downturn than the US." Europe also relies less heavily on equities as a source of of personal wealth than the US. Equities are worth about 150 per cent of gross domestic product in the US but only 60 per cent in Germany. So a market crash would have less effect on spending. Japan's outlook is less good. Its direct reliance on exports to the US is not much bigger than Europe's - about 3 per cent of GDP - but exports to the rest of Asia provide a further 3.6 per cent. In addition, it is vulnerable to a loss of confidence. The weakness of the Japanese stock market - by far the worst-performing developed country market last year - and the recent fall in the yen reflect deepening nervousness about how badly Japan's fragile economy may suffer. For the moment, confidence in Europe remains strong: French consumer confidence hit a new record last month. "The risk, as we saw with the Asian crisis of 1998, is of a wave of negative sentiment sweeping across the Atlantic and hitting businesses and consumers," says John Llewellyn, an economist at Lehman Brothers. If domestic investment and consumption fell, it would be more serious for European countries than a loss of exports. The other advantage that Europe has over Japan is that it is possible for the central bank to make meaningful cuts in interest rates: in Japan rates are already close to zero. A US and Asian downturn would put downward pressure on world prices - an effect that has already emerged in the oil market - and keep the lid on European inflation. The European Central Bank has scope to cut rates in response. Like the Federal Reserve in the US, the ECB now has the job of keeping spirits up during the difficult months ahead. It can at least comfort itself with the thought that, this time, its job may be easier. Additional reporting by Peronet Despeignes _______________________________________________ Crashlist website: http://website.lineone.net/~resource_base
