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2001 In Review: The 1990s Economic Boom Comes To An End

  • Mark Baker

In recent economic history, certain dates stand out as black marks. The year 1960 saw the end of the boom years of the 1950s. Economists note 1973 as the end of the economic expansion that started in the 1960s. Now, economists will add 2001 to that list -- as the year the great rally of the 1990s came to a halt. RFE/RL correspondent Mark Baker looks back on 2001 from an economic standpoint.

Prague, 12 December 2001 (RFE/RL) -- The year 2001 is likely to join 1960, 1973, and 1991 in economists' memories as a benchmark year signaling the end of a period of pronounced economic expansion.

In March, the U.S. economy -- the world's largest -- ended 10 years of uninterrupted growth and began contracting. The recession ended the 1990s boom that was fueled by billions of dollars flowing into high-tech investments that propelled the U.S. economy to annual growth rates of more than 5 percent in some years. It was the longest period of continuous economic expansion in U.S. history.

The U.S. downturn was quickly felt in the European Union and Japan, and what started off as a promising year for the global economy ended with the world's three leading economic regions -- the U.S., Europe, and Asia -- either in recession or on the brink.

The European Union's 12-nation euro-zone began the year with a relatively upbeat growth projection of around 3 percent and ended the year expanding by less than half that. Growth in Germany -- the EU's largest economy -- stalled at mid-year, and by October it might well have entered into recession.

James Knightley, an economist at ING Barings investment bank in London, says part of the gloom can be explained by the 11 September terrorist attacks, which aggravated an already deteriorating situation.

But by any measure it was a bad year, he says: "[2001] will obviously go down as a weak -- a very, very weak -- year. This unusual occurrence that has been going on [the economic uncertainty caused by the 11 September attacks] certainly explains a lot of it. But it's certainly going to be one of the sharpest corrections after the huge growth rates that we saw in the year 2000, to then have this sudden sharp contraction in 2001. Historically, it's virtually unprecedented, I would say."

The determination that the U.S. formally entered into recession came in a report issued in November by the National Bureau of Economic Research (NBER), a nonpartisan board of economists recognized as the arbiter of when such cycles begin and end.

The NBER assessment will likely be confirmed by the U.S. Commerce Department in January, when it releases a report on U.S. economic output (gross domestic product) for the fourth quarter of the year. The Commerce Department said the U.S. economy shrank by more than 1 percent in the third quarter (July-September). A decline in the final quarter would mean two quarters of consecutive contraction -- a standard definition of recession.

The NBER did not identify the cause of the recession, but Knightley traces the slowdown to 2000 when businesses -- flush with excess inventory -- cut back on purchases. The cutbacks rippled through the economy, hurting corporate earnings and stock prices and ultimately sparking unemployment and a deterioration in consumer confidence.

"We started seeing growth start to weaken well into late 2000 and early 2001, and it sort of gradually continued through as the equity market weakness sapped consumer confidence," Knightley says. "We started to see a slowdown in spending from that area. And then obviously the events of 11 September added another shock to the system, as well. So we saw a further lurch downwards in consumer confidence and manufacturing confidence."

Europe felt the downturn in two ways: through reduced exports to the U.S. and ultimately through reduced business and consumer confidence.

Knightley says: "We've been seeing the pass-through effect into Europe quite quickly. Europe was starting to follow -- with a six-month lag -- through this year. We saw that with the purchasing manager indicators [planned expenditures by industries] and the industrial production data. But then after 11 September, we've seen another downward lurch into Europe. And so the slowdown is coming much more together."

Stefan Schneider, an economist at Deutsche Bank research, says the recent downturn simply underscored Europe's continuing dependence on the U.S., despite hopes by European Union officials to the contrary. He says any recovery in Europe would first have to be led by the U.S.

"Europe is pinning its hopes on recovery mainly on a rebound in the U.S., and so the timing obviously depends crucially on whenever the rebound in the U.S. will come," Schneider says. "But as the [NBER report] said, it probably won't come before the middle of next year and won't help us over the next two or three quarters.

The NBER did not say how long it believes the U.S. will remain in recession, but previous downturns have usually lasted slightly less than a year. That would mean the recession could be over in the U.S. as early as next year and in Europe six months later.

Major organizations and financial institutions have all significantly cut global growth forecasts for 2002. The UN in October said worldwide economic growth next year will be about 2 percent, down from an earlier forecast of 3 percent.

Policy-makers on both sides of the Atlantic were quick to act to avert a prolonged downturn.

The U.S. central bank, the Federal Reserve, cut interest rates a record 11 times during 2001, lowering its benchmark lending rate (now at 1.75 percent) to levels not seen since the early 1960s.

The European Central Bank (ECB) was more cautious but began reducing rates after mid-year when it became clear that Europe was not immune to the U.S. downturn. It cut its rate four times this year.

Rate reductions traditionally help spark economic growth by making it easier for companies and individuals to borrow money to finance more purchases. But some economists have questioned whether the reductions will do much good, since consumer and business confidence remain low.

John Higgins, a senior economist at Nomura Securities in London, told RFE/RL earlier in the year that because of the nature of the downturn -- sparked by excess inventories and indebted companies -- it's not clear whether lowering rates will help: "If you've got a large excess-capacity overhang -- a period in which there is excess investment and a buildup of capital stock -- then loosening monetary policy doesn't necessarily resolve that."

Higgins points to Japan, where central bankers have lowered rates to near zero, yet companies -- burdened by debt -- cannot afford to borrow. Japan remains mired in recession with little prospect for a quick recovery.

The U.S. government also has been quick to inject money into sectors hard hit by the September attacks, approving about $40 billion in extra spending, including a $15 billion bailout plan for the airline industry. That came on top of a retroactive tax cut that was distributed to taxpayers earlier in the year.

A more comprehensive stimulus package is being debated in Congress, but it is unclear whether the package would rely more on tax relief, as favored by President George W. Bush's Republican party, or on direct relief to affected sectors, as urged by the Democratic Party.

Knightley says the cumulative effects of fiscal and monetary stimulus will eventually spur a recovery: "We [are] looking for a rebound starting early next year. I mean, we have some huge levels of fiscal easing, with the tax rebates that were introduced earlier this year. We've also had a huge level of monetary easing from the Federal Reserve. So [this monetary policy and the easing we've seen] should well lead to a rebound later next year."

Deutsche Bank economist Schneider says the stimulus may not be necessary. He points to several positive signs, such as falling world oil prices and continued low inflation, that will contribute to recovery, independent of government actions.

He cautions that any benefits could be offset if businesses and consumers continue to feel uneasy about the future: "What might help a little bit is the massive deceleration in inflation, mainly due to the decline in oil prices. So there will be an increase in real purchasing power, but that might be offset by higher savings because of increasing unemployment and precautionary savings by consumers."

If, in fact, flagging confidence is contributing to the downturn, the best news for the economy would be a successful resolution to the war in Afghanistan and the fight against terrorism.

The slowdown in the U.S. and Western Europe this year was felt strongly, too, in Eastern and Central Europe.

Vike Gronenburg, an emerging-markets analyst at Salomon Smith Barney in London, tells RFE/RL she thinks "for all countries of the region it has been a disappointing year in the sense that economic growth was below official projections."

She points to growth projections for Hungary, Poland, and the Czech Republic -- the leading economies in the region -- which were all in the 4 to 5 percent range this year.

She says real growth, however, failed to live up to forecasts -- dulled by falling orders from customers in the European Union, primarily Germany. The Czech Republic, for example, was expected to grow by around 3 percent this year.

Looking to next year, she says the outlook remains poor: "[The outlook] is not better. I would argue that in all countries you're going to see an even weaker growth rate next year than this year. That is because at least at the beginning of this year, economic growth was quite strong and then it slowed down. While next year, economic growth is going to start from a lower level."

Gronenburg says one bright spot -- at least in Hungary and the Czech Republic -- is local elections. She says the economies there can't collapse because the governments in power -- and which want to stay in power -- won't allow it.

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