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The yin and the yang of economic recovery

Asia, Japan, and Western Europe show signs of recovery, but it's a mixed blessing - especially for US.

The United States - enjoying the most robust economy since the 1960s - has for years bullied Japan to step on the economic gas. It's whispered to Western European countries that changes in its welfare society might boost growth rates and lower unemployment. It told Asian crisis countries that financial reforms would help.

But even while adopting some of the American advice, 1998 was a bad year for most countries. World output was up a mere 1.9 percent after inflation.

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Now some key parts of the global economy are showing signs of recovery. That's good news for the regions enjoying an upturn in output. But it may not be an unmitigated blessing for Americans. The pickup in Japan, southeast Asia, Canada, and Western Europe could bring to the US increased inflation, higher interest rates, and a weaker dollar, economists say.

In other words, US wage gains could be nibbled at by rising prices, mortgage and credit-card loans will cost more, and that vacation trip in Europe could become more expensive.

The economists' thesis is that extra demand by consumers abroad for US goods and services will hike prices here and swell US exports. That will put new strains on an already stretched American economy.

"It's a lovely problem to have," says J. Paul Horne, an economist in London with Salomon Smith Barney, a major investment banking firm. Much of Europe has jobless rates above 10 percent.

But with unemployment in the US at 4.3 percent - a 30-year low - the Federal Reserve is already worried that the US economy is running too fast. It raised interest rates slightly only last month as a preemptive move against inflation.

The overseas recovery is "a factor leading to concern at the [Federal Reserve]," says Mr. Horne.

Alan Greenspan, chairman of the Federal Reserve, which controls US monetary policy, is scheduled to testify before Congress on July 22, and is expected to talk about world economy.

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Right now, the US economy is vibrant. Gross domestic product rose at a 4.3 percent annual rate in the first quarter of 1999. Though most economists are predicting it to slow as the year progresses, American consumers and businesses are still sucking in imports at a fast pace. In May, imports reached $98.9 billion and the trade deficit $21.34 billion, the Commerce Department reported July 20. The deficit was more than what Wall Street expected.

Recovery lags in much of the world

For most of the world, though, the recovery is still inadequate.

A new United Nations report on the world economy sees only "a minor improvement," and in some cases continued economic deterioration. World output will rise 2 percent, not enough to keep up with population growth in many nations.

"In the majority of countries," the UN report says, "growth for the foreseeable future will fall far short of what is necessary to effect a substantial improvement in living standards and a reduction in the number of people living in poverty."

The UN economists say that of the 95 developing countries for which they have reliable data, only 13, including China, will grow enough this year to experience a rise in living standards and a decline in poverty.

In 1998, output per head rose in all developed countries except Japan and New Zealand. But in developing nations, roughly 1.2 billion people lived in the 40 countries that suffered declining living standards.

Rich countries expect more growth

In the rich countries, it is a different story.

Gross domestic product (GDP) should be up 4.25 percent this year in North America, where the US economy is dominant, the UN projects. Japan's economy will reverse its decline and rise 1.5 percent. Western Europe will grow 3 percent.

Ulrich Ramm, chief economist for Commerzbank in Frankfurt, one of Germany's Big Three banks, talks of "a better second half in Europe and for Germany."

He's predicting 2 percent growth after inflation in Europe, and 1.6 percent in Germany. He says 2000 should look even better.

But that growth rate won't trim the 10 percent plus rate of unemployment in Germany, he says. What may help is the retirement of 100,000 or so among those that are jobless.

"We need more structural reforms in the labor market to come up to full employment like we experienced some 20 years ago," Dr. Ramm says.

Within Europe, the Netherlands, Spain, Portugal, and Ireland are growing rapidly. Economists estimate that France will grow some 2 percent this year and 2.6 percent next year. Britain's economy is expected to revive from a modest 0.8 percent this year to 2 percent in 2000. Italy is dragging behind much of continental Europe with 1 percent growth this year, better next year.

Western Europe imports 10 percent of American exports. So European recovery won't boost the US economy dramatically, says Martin Hfner, chief economist of HypoVereinsbank in Munich, Germany.

Japan's growth rate picks up

Japan, with the world's second largest economy, is the big story. Pumped up by huge public works, the Japanese economy grew at a fast annual pace in the first quarter, surprising most economists.

"Japan's coming out of the economic valley," Ramm says.

In the process, though, it has become the industrial world's champion in terms of government red ink. By running huge budget deficits, Japan's government has doubled its debts in the past seven years to the equivalent of 115 percent of annual GDP.

Ups and downs of other countries

As for the rest of the world, the scene is mixed.

Brazil's economy is bouncing back after devaluing its currency. Argentina is struggling with fears it will devalue, despite the tight peg of the peso to the dollar.

Canada's economy is picking up from an upturn in the prices of crude oil and other commodities.

Russia is still floundering, with the International Monetary Fund and World Bank reportedly close to making fresh loans.

China's economy grew at a 7.2 percent annual rate in the second quarter, signalling a slowdown. But Chinese living standards are still rising on average.

Mexico expects 3 percent growth this year and 5 percent next. Stock prices in Mexico are up 45 percent so far this year, three times better than the Dow Jones Industrial Average here.

Investors in the developed world are apparently convinced that recovery is real. They have pushed up the total value of all corporate shares in their countries by $7 trillion since the financial meltdown last October to an all-time record of $25 trillion.

That compares with a world output of real goods and services of $30.2 trillion this year.

(c) Copyright 1999. The Christian Science Publishing Society

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