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| February 10, 2003 | Monday | Zul Hijjah 8,1423 |
World economies
Top economic policy makers from the world’s major industrialized economies rejected widespread criticism that they were dragging their feet on efforts to restore growth. Ministers from the United States, Japan, Germany and France all said sound policies were now in place to stimulate the long-term growth of their economies. But some conceded that short-term prospects were far less rosy.
The meeting has highlighted sharp divisions between the policy makers and some private sector economists who have urged far more aggressive measures to reignite the global economy which has been dragged sown by the sluggish performance of the United States, Japan and Europe. Prospects have also been clouded by investor-fears of a war against Iraq and widespread skepticism at the pace of structural economic reform in the major nations.
Obvious divisions between the United States and the European nations over Iraq have also added to concern. There are very significant divisions between Europe and the United States. From a business point of view, it is very important that this not be allowed to contaminate the economic relationship.
The US Commerce Secretary said American growth was underpinned by strong productivity gains which now appeared to be anchored in the economy. President George W. Bush’s newly unveiled package of tax cuts would add a short-term stimulus. Forecasts for the US growth range from fears that the fourth quarter of last year actually turned negative to some expectations that 2003 could see a rate of up to 3.5 per cent.
The euro zone is on track for weaker growth than previously forecast in the fourth quarter of 2002 and may contract in the first three months of this year. Highlighting the fragility of the bloc’s economy, a model used to forecast quarterly growth is predicting expansion of between 0.1 per cent and 0.4 per cent in the last three months of 2002, down from an earlier forecast of 0.2-0.5 per cent.
At worst the euro zone economy could contract by as much as 0.1 per cent in the first quarters of 2003 and at best it could grow by 0.3 per cent. This compares to the previous forecast which ranged from a contraction of 0.2 per cent to expansion of 0.2 per cent.
After two years of cost-cutting, business spending should lead to a modest US economic recovery in 2003. Businesses are making higher profits and generating more cash and they have to do something with it. The consensus among the 55 economist was that the US gross domestic product would grow at an annual rate of 2.7 per cent in the first quarter of 2003, 3.2 per cent in the second quarter and 3.7 per cent in the last two quarters.
Unemployment, they expect, will drop to 5.7 per cent from the current 6.0 per cent. The only cloud in the economists’ relatively rosy forecast are the dual threats of war with Iraq and terrorism. A possible war with Iraq, unless it is short and easy as some economists predict, could drive oil prices higher, increasing corporate costs and sapping household budgets.
Most economists indicated business investment profits would increase by seven percent for the year. On consumer spending as a stimulant for economic growth, the group was divided with some predicting weaker spending and others suggesting consumer spending would maintain a healthy pace. Fiscal stimulus by the government was favoured by the economists in the group as the most important engine of economic growth. Regarding interest rates — currently at a four-decade low of 1.25 per cent, economists predicted further cuts by the Federal Reserve this year some said there would be no more cuts, with most believing they would go up instead.
Japan’s moribund economy is stirring to life but global leaders questioned whether the world’s second largest economy can stomach the tough medicine it needs. Under his financial restructuring programme, banks and corporations at last are starting to clean up their balance sheets by writing off bad investments, and they are raising fresh capital — a precursor to recovery. This restructuring will take two years to complete, and then Japan can return to a two per cent annual growth rate and put 12 years of stagnation, deflation and recession behind it.
Business leaders and politicians from other major industrialized nations hope that the Asian country once more can become a powerhouse for global growth. It would be a great error to think that Japan cannot move out of this delicate situation. There are a combination of actions needed to get Japan moving again. Japan’s leaders must have the stomach to allow unemployment to rise and corporations to collapse if it wants to purge its economy of failed institutions and then redirect capital to more productive uses.
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