U.S. Blamed For World's Economic Blues
Global economic and political leaders who gathered for their annual mountaintop meeting Thursday heard a depressing prognosis for the world economy, and blamed the situation on one country: the United States.
"Sadly, it's a U.S. story," said Stephen Roach, chief economist at Morgan Stanley in New York, one of five prominent forecasters on a panel to set the scene on the world economy.
With the U.S. economy "still mired in a post-bubble hangover," he said, "the world is going to remain a sluggish place."
The reason: When America's economy slows, its consumers import less, and American demand for foreign goods is crucial to other economies.
The gloomy view reflected the mood at the World Economic Forum, back in the Swiss Alpine resort of Davos after it was held last year in New York in a show of post-Sept. 11 solidarity.
A year of corporate scandals, executive sackings and turbulent markets, along with the threat of terrorism and fears of war in Iraq, cast a pall over this year's meeting.
About 2,300 participants are expected, down from 3,200 two years ago. Roughly two dozens heads of state signed up, down from more than 30 in 2001. Secretary of State Colin Powell is to arrive on Saturday, but France's foreign minister has cancelled.
Organizers even called off Saturday's traditional black-tie evening gala; jazz guitarist Larry Woodley will play and sing the blues Friday night instead.
Economists at the morning session warned that the threat of war was also the big unknown threatening economic recovery in 2003.
"We are sitting here looking forward to a set of risks — namely war — that have some truly profound downsides," said Gail Fosler, chief economist at the Conference Board, a U.S. business group.
If a war on Iraq causes world oil prices to double, the tax cuts proposed by President Bush should be enough to "virtually offset" the impact on the United States, she said.
But if such a war provokes new terrorist attacks, the resulting blow to consumer sentiment could send the United States into a recession, she warned.
Economists from Europe and Asia offered their own, equally pessimistic views.
Japan's hope for an export-led recovery is contingent on the health of the United States, its best customer, said Haruo Shimada of Keio University in Japan. "It's up mainly to the American economy," he said.
For other countries as well, its important that America buy more overseas than it sells. According to the International Monetary Fund, the United States ran a trade deficit of about $400 billion in 2002. By comparison, Europe ran a trade surplus of $50 billion, Japan about $120 billion and other advanced countries about $100 billion.
A drop in American demand hurts sales of imports directly, when people here buy less, and indirectly, through changes in world prices.
A recession in the United States can reduce interest rates, sometimes reducing demand for dollars on the world market, because dollar-denominated stocks and bonds have a lower yield when interest rates fall.
If demand for dollars falls, the dollar gets cheaper compared to foreign currencies. That means American goods are cheaper for foreigners to buy, meaning some consumers overseas will ditch national brands for U.S. imports.
Looking elsewhere, the one bright spot was China, whose economy is growing at such a rate that it could surpass the European Union's by 2020, Fosler said.
Zhu Min, economic adviser to the president of the Bank of China, boasted about his country's recent development into a low-cost manufacturing hub for increasingly high-tech products.
China makes about 75 percent of the world's disposable cigarette lighters, but also 17 percent of its microwaves, 30 percent of its televisions and 35 percent of its refrigerators, he said. China used more steel last year than the United States and Japan together.
Others, though, pointed to past success stories including Mexico and Japan that are now struggling because of poor planning and government policies.
"The sun also sets," Shimada warned his Chinese colleague.