Policy makers in the federal government and the Federal Reserve of America have thrown everything but the kitchen sink at the ailing economy, and economists are saying their efforts will spur relatively robust growth in second half of 2003.
The US economy, once again is going to be the locomotive for global growth, but given the condition of Europe and Japan, economists don’t think the US is going to end up pulling the rest of the world along very fast. “The growth in the second half of 2003 may be twice as strong as in the first, fuelled by the most potent combination of stimulus measures in 62 years”.
In the US, the stage for recovery is being set by: a 19 per cent drop in oil prices since mid-March; the Fed’s 13th rate cut of the cycle, taking the Fed funds rate at one per cent to 45-year lows; a weakened dollar, which should help make the US exports more competitive overseas; improving consumer confidence — critical, since consumer spending makes up more than two-thirds of the economy; a $350 billion package of federal tax cuts together with aid to states; and a healthier stock market making consumers feel wealthier.
A faster recovery may send stock prices and bond yields higher as investors become more confident in the expansion. The Dow Jones Industrial Average has risen 19 per cent since its low for the year on March 11. Yields on the 10-year Treasury notes have fallen to 3.56 per cent from 4.18 percent in January. The recent rise in stock prices has come in the face of skepticism among some investors that the gains might still be a bear-market trap, that may make the rally more sustainable than those of early 2001 and after the Sept 11 terrorist attacks. This means that if the economy does pick up, it will still be a surprise to most people.
What the predicted acceleration won’t do, according to investors is spur enough hiring to cut unemployment or pull Europe and Japan out of their economic doldrums. The economies of Germany and Italy shrank during the first quarter of this year, and the euro’s 16 per cent gain against the dollar in the past 12 months is expected to hobble the European exports. Japan’s economy has stagnated for a decade.
The Federal Reserve Board reduced its overnight lending rate recently by a quarter-point to one per cent — down from 6.5 per cent before January 2001, when the US central bank made the first of 13 rate cuts, and the lowest rate in 45 years. That potential boost is expected to come from $330 billion, 10-year tax cut.
In a TV interview, Treasury Secretary John Snow predicted a nice pickup in the economy with expansion reaching well over three per cent in the second half.
A survey of 55 economists in early June found a median expectation that growth would more than double from the first quarter’s 1.4 per cent to 3.3 per cent in the third and 3.5 per cent in the fourth, heading towards 4 per cent or higher in 2004, the best since 1999. “ I think there is a modest, yet fragile recovery taking place,” Kenneth Lewis, chief executive officer of Bank of America said in an interview. I think the strength in refinancing and home equity lending will continue through the remainder of the year.
So far, there have been few clear signs that the US economy is accelerating. Retail sales were unchanged in April and May. New orders for durable goods rose 1.3 per cent in March and fell 2.3 per cent in April. Industrial production fell 0.6 per cent in April and rose 0.1 per cent in May. Purchasing Manager’s Index rose to 52.5 in June from 52.2 in May; a figure less than 50 shows contraction in the economy. The US factories are still operating at just 74.3 per cent of their capacity, the lowest in 20 years.
The National Bureau of Economic Research, the private group of economists in Cambridge, Massachusetts, that determines when recessions start and stop, hasn’t declared an end to the slowdown that began in March 2001. It’s faith-based forecasting at its best.The Bureau says — With a little job growth, long-term interest rates could rise significantly, weakening the markets for housing, autos and mortgage refinancing. So the economy won’t come roaring back.
The gap between the US and its major trading partners may widen, economists say. For the 12 nations that share the euro, growth this year will be between 0.4 and 1 per cent and next year, 1.1 to 2.1 per cent, according to European Central Bank projections. Economists surveyed this month by the Blue Chip economic indicators predicted that Japan will expand 0.8 per cent in 2003 and 1.1 per cent in 2004.
The German economy, which accounts for about a third of the $8 trillion euro region, has barely grown since a recession at the end of 2001. Unemployment, which rose in 13 of the past 14 months and was near a 5 1/2-year high in May, may damp consumer spending this year.
Business confidence rose for a second month in May after the European Central Bank cut interest rates to two per cent early June, the lowest in the dozen euro nations for more than half a century ahead deflation fears. Inflation in the dozen Euro countries accelerated for the for time in 4 months in June, easing concern that deflation will push the economy into recession. Wim Duesenberg, President European Central Bank said in his comments on the recent Inflation data which showed consumer prices rose two per cent from 1.9 per cent in May; “ I am not concerned about deflation because there is none. Its psychological — if people see the inflation rate dropping month after month, they will give more credence to the deflation theory”. The tax reductions, which will also benefit small and medium-sized companies, may help the Euro-economy to climb further.
Japanese government says it expects the economy to grow by 0.6 per cent in the year ending March 31, 2004. Japan’s economic growth slowed to a gain of 0.1 per cent in the first quarter as the Iraq war hurt exports. The economy probably shrank in the second quarter because severe acute respiratory syndrome cut shipments to Asia, which buys two-fifth of Japan’s shipment.
Among the hurdles in Japan are deflation and more than 52.4 trillion yen ($440 billion) of non-performing bank loans. Consumer prices have fallen for five years, land prices for 11 years, and Japan’s economy is smaller now than it was in 1996. This year, exports have slowed, threatening to reduce what little growth there is.
But the recent numbers from Japan create a bit of optimism about the Asia’s biggest economy that it may be moving a step out of a decade long recession. Consumer sentiment among large manufacturers rose to minus five in the second quarter from minus 10 in March, the Bank of Japan’s quarterly Tankan survey showed. That was the highest since March 2001. A negative number means pessimists outnumber optimists.
Executives at Japan’s large manufacturers were the least pessimistic in two years in June as the stock indices rose from 20-year lows, suggesting the world’s second-largest economy may dodge a fourth recession since 1991. Companies in Japan’s most closely watched survey of business sentiment said they would raise spending by 4.9 per cent, improving the outlook for growth, compared with a 0.8 per cent cut planned in the previous survey.