Wednesday, November 28, 2001
A New Domino Theory: Industrial Economies Tumbling One By One
BY TERRY JONES
INVESTOR'S BUSINESS DAILY
The U.S. is in recession. That's now confirmed. What about the rest of the world?
On Monday, the National Bureau of Economic Research, the panel of economists that officially marks economic cycles, declared the U.S. economy has been in recession since March.
But the U.S. isn't alone.
One by one, the world's top economies are rolling over, turning what just months ago was a U.S. slowdown into a global downturn. And it looks to be much worse than first thought.
"Global growth of less than 2% is a recession," said economist Nariman Behravesh. "This year you're going to have 1.3% growth, next year about 1.8%."
Behravesh is chief economist with DRI-WEFA, a major economic consultancy.
Just this week, officials in the United Kingdom and Germany, Europe's key economies, issued new growth warnings. Despite interest rate cuts by the European Central Bank, output, inflation and confidence continue to slide.
In Japan, the economy's already shrinking, with little end in sight.
This follows a number of other recent warnings that, unless nations act fast, the world will soon be in a global recession. Consider:
• The Organization for Economic Cooperation and Development forecast this month that the world's 25 richest economies would shrink 0.3% in the second half of this year - the first drop in over two decades.
• The International Monetary Fund last week slashed its 2001-02 estimates for world growth to 2.4%, half last year's growth rate. IMF Managing Director Horst Koehler warned that an "extraordinary degree of uncertainty" following Sept. 11 means the forecast could be cut further.
• The European Commission said a flood of bad news forced it to rejigger its 2002 estimate down to 1.3% from this year's already-weak 1.6% growth.
Few of these forecasts see outright contraction. But few saw the current downturn, either.
So why do all the world's major economies suddenly seem to be falling into recession together for the first time since the 1970s?
The short answer is: the U.S.
Despite the creation of the new 15-nation euro zone and once common fears of Japanese dominance, the U.S. economy is still the biggest - and most influential - in the world (see image). As the saying goes, when the U.S. sneezes, the world catches cold.
A recent IMF study found that from 1974 to 2000, shifts in the U.S. economy explained 28% to 78% of the changes in GDP for other major countries, such as Japan, Germany, France, Italy and the U.K.
Like it or not, the U.S. makes up nearly 25% of the world's GDP — and that makes it relevant.
That can be seen in a report issued quietly a week ago by the EU.
The report warned that Europe's economies and standards of living are falling compared with the U.S. due to the region's failure to adopt new technologies.
But officials in Europe and Japan feared the kinds of changes that might boost growth. In the EU, the new European Central Bank has shown a reluctance to cut interest rates. Japan has resisted deregulation and financial reform.
So the rest of the world is looking to the U.S. for help.
That may be why the OECD on Tuesday did something unusual: It suggested the U.S. cut tax rates to keep the world economy afloat.
The OECD, not known to take anti-tax positions, said the U.S. needs to cut taxes on capital and income for everyone, including the rich. It suggested a top income tax rate of 28% vs. the current 39.6%.
"The top rates for income tax and estate tax stand out, while the corporate tax rate is no longer among the lowest," the OECD said. |
