February 19, 2001

G-7 Offers Optimistic Assessment of Global Growth
By Farah Nayeri, Iain Rogers and Mayumi Otsuma, Bloomberg

The Global Economy May Avoid Recession, But The U.S. Won't ... Weiss comments

PALERMO, ITALY - Finance ministers and central bankers from the Group of Seven major industrial nations said the global economy will avoid recession, even as they called on the U.S. and Japan to do more to ensure expansion.

"Global growth will be mainly good this year, though somewhat lower than we expected," when the G-7 ministers met last September in Prague, said Italian Treasury Minister Vincenzo Visco, who hosted today's meeting.

American demand for products from Asia and Europe has cooled along with the U.S. economy. The comments suggest the G-7 isn't worried that the slowdown, and a shrinking Japanese economy, will pull down the rest of the world.

U.S. Optimism

Although growth in the U.S. has slowed, the ministers and central bankers offered an upbeat assessment of prospects for the world's largest economy.

"We agreed that the fundamentals for sustained growth remain in place," Treasury Secretary Paul O'Neill said.

The International Monetary Fund told G-7 officials that it now expects the U.S. economy to grow 1.7% this year, down from an earlier forecast of 3.2% growth made in September. The world economy will probably expand 3.4%, compared with the September estimate of 4.2% growth.

Japan Pessimism

The outlook for the Japanese economy, which contracted 0.6% in the third quarter, isn't as good. The G-7 forecast only a "modest recovery" in the world's second largest economy, and warned of the possibility of deflation.

Japan's third quarter contraction has raised concerns the country could slip back into recession after just two quarters of growth. It has lagged the other major industrial economies for much of the last decade.

When U.S. Treasury Secretary Paul O'Neill said, "The fundamentals for growth remain in place," we're reminded of what one passenger said to another aboard the Titanic: "This is the best ship afloat except for that big hole in the bottom."

The outlook for the U.S. economy is hardly ship-shape. Bad debts are ballooning. The number of bankruptcy filings by big companies last year was more than double that of any year since 1980. Big name companies including Trans World Airlines, Bridge Information Systems, and Loews Cineplex filed Chapter 11 in the past few weeks. Sunbeam is history. When bankruptcies and loan defaults occur, investors can't help but become wary of the stock market.

And, consumers aren't getting a warm and fuzzy feeling about the economy either. Goodyear, Dell, Nortel, DaimlerChrysler, Lucent, Sara Lee, Whirlpool, and other giant companies have announced that they will lay off many thousands of employees in cost-cutting measures. And many more consumers are waiting to see if they will be next to get pink slips. Meanwhile, they stop spending, which only sends the country deeper into recession.

Want a glimpse of our future? Take a look at another G-7 member -- Japan. That country's economy has been in and out of recession for the past 10 years. The stock market bubble burst more than a decade ago, and it's still getting worse. The Nikkei index is approaching 15-year lows. The Bank of Japan has cut interest rates to virtually zero, and shell-shocked consumers still won't borrow or spend. Plus, the banking system is awash in bad debt and on the verge of collapse.

The U.S. has a long way to go before reaching Japan's financial depths: The bubble still hasn't completely deflated on the Nasdaq or the Dow. The price-to-earnings ratio for the Nasdaq-100 Composite is nearly 700, when a normal valuation historically is around 15 to 18. The Dow has only fallen 7% from its peak in January 2000, and still has a long way to fall.

The next few months should tell if the U.S. is going to be sucked into the same kind of economic vortex that has swallowed Japan. But there is little to show that the economy is pulling out of its downward spiral. Fed rate cuts have failed to reignite the economy while at the same time inflation is rising -- making more rate cuts problematic. President Bush's tax cuts will be too little too late. And since the U.S. is the economic engine that drives the world, our decline could very well drag down the rest of the world with us. Our advice: Hope for the best, but prepare for the worst. Because the worst is yet to come.

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