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U.S./ EU: Economies Send Out Mixed Signals On Growth

  • Mark Baker

The global economic slowdown is now in its third year, and clear signs of a pickup in economic activity are not yet in sight. There are some signals that the U.S. -- the world's biggest national economy -- is resuming sustained growth. But for every good piece of news, it seems there are discouraging ones as well. The situation is much the same in the European Union's eurozone, which is looking to the U.S. to lead it out of an economic slowdown.

Prague, 5 August 2003 (RFE/RL) -- The U.S. economy continues to send out mixed signals on whether a long-awaited economic recovery is finally underway.

The U.S. government last week reported the economy expanded at a relatively robust rate of 2.4 percent in the second quarter (April-June) of the year. Although part of the growth in GDP was attributed to higher defense spending because of the war in Iraq, the figure was still better than growth rates in Europe and in the U.S. in previous quarters.

But that piece of good news was undercut by a report from the U.S. Labor Department showing the economy is losing jobs. Payrolls in July fell by some 44,000 jobs -- after dropping 72,000 in June. The overall unemployment rate actually improved to 6.2 percent from 6.4 percent the previous month -- but this was attributed to people giving up the search for work and dropping out of the labor market.

Colin Asher, an economist with Nomura investment bank in London, says the statistics, on balance, are mostly positive. He says capital expenditure -- or investment by private companies -- is starting to grow again:

"The [economic growth] data was very encouraging -- if you strip out the rise in defense spending, which obviously boosts [economic growth], and look at the remaining sectors of demand, than I think that two sectors were particularly encouraging," he says. "First, the capital expenditure data rose during the quarter, which suggests that we are starting to see a turnaround there. And the other feature that was encouraging in the GDP report was the fact that inventories actually fell over the course of the quarter."

The economic boom of the 1990s led companies to amass huge inventories of unsold goods. Falling inventories are important because companies will have to start producing again.

The U.S. accounts for a sizable share of the world's economic activity and movements in the U.S. economy are watched closely around the world. Any pickup in the U.S. could lift the world out of its economic doldrums.

The U.S. entered recession in 2001 and the downturn was made worse by the 11 September terrorist attacks that year. The recession was soon felt in much of the rest of the world -- above all in Western Europe, which exports its products to the U.S. and relies on U.S. investors and companies as a source of capital. Germany, the European Union's largest national economy, has been teetering on the verge of recession for the past two years.

In step with the U.S., the outlook for Europe is mixed, yet analysts see some positive signs.

Laurence Boone, an economist at the Organization for Economic Cooperation and Development in Paris, recently co-authored a survey on the 12-nation eurozone area. Her group expects the eurozone to start recovering later this year:

"There is less uncertainty [in the international economy] than there was six months ago due to Iraq, and the U.S. is now displaying signs that it will start growing again, so we are still confident that the euro area should enter into [sustained] recovery at the end of 2003," Boone says.

The German economic research institute Ifo recently upgraded its prediction for German growth next year to 1.7 percent from 1.5 percent. The institute based its revision on a recent report showing that business leaders are optimistic about the future, in part because of an ambitious program of economic reform announced this year by Chancellor Gerhard Schroeder.

Reports also show that consumer confidence -- an important factor in economic growth -- remains relatively high throughout the eurozone. Historically low interest rates should also help to support economic growth.

The European Central Bank -- after being criticized for not moving quickly enough to cut interest rates to blunt the downturn -- has now trimmed its main interest rate by 1.25 percentage points (to 2 percent) in the past eight months. Lower interest rates generally help economies to grow by making it cheaper for companies and investors to borrow money.

Still, there are clouds on the horizon.

"[This is] partially because of the international environment -- the U.S. has not picked up as fast as we expected -- and also because of subdued consumption within the euro area, and subdued investment. People are not confident in the euro area. Unemployment has started slightly rising again so that private consumption remains slow," Boone says.

The eurozone must also contend with the consequences of a rising euro. The euro has increased sharply in value against the U.S. dollar this year, making exports to non-eurozone countries more expensive. The rising euro also hurts service industries such as tourism.

Boone says there are two sides to the rising euro -- one bad and the other good: "You have two sides to this coin. One is if [the euro] carries on rising like that -- which is not happening -- then it penalizes exporters by making the prices of their products too high. On the other hand, it is also helping to control inflation. And if inflation comes down, then the European Central Bank is more likely to lower interest rates to help growth."

One positive effect of the rising euro has been to blunt the price of oil, which is denominated in U.S. dollars. While world oil prices remain at a relatively high levels, fuel prices in Europe have stayed steady, and in some areas have dropped.