U.S. and global economies slipping in unison | IHT

IHT, by Peter Goodman, 23/08/2008

Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening businesses around the world with the loss of the international sales and investment that have become increasingly vital to their sustenance.

Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.

Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies. The International Monetary Fund expects global growth to slow significantly through the end of this year, dipping to 4.1 percent from 5 percent in 2007.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere," the IMF declared last month in its official World Economic Outlook.

One consequence of the changing dynamics of the global economy is a small but significant shift in currency trading. The dollar has been strengthening against many currencies in recent weeks — not so much because of a new-found belief in American prospects, economists say, but because investors are edging out of markets that are weakening, like Britain and other parts of Europe, sending down the pound and the euro.

"It's the rest of the world going down, not the United States going up," said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard.

A stronger dollar makes American goods more expensive on world markets. If the dollar keeps strengthening, it could pinch sales of U.S. exports while helping European exporters make up some ground.

In the United States, "exports have been sort of holding us out of the graveyard," said Martin Baily, a former chairman of the Council of Economic Advisers in the Clinton administration, and now a senior fellow at the Brookings Institution in Washington. "That may begin to peter out a little bit if the dollar continues to climb."

Some economists argue that the dollar's recent strengthening is a correction after six years of declines that have sapped it of one-fourth of its value against the currencies of major trading partners. Still, others worry that the dollar has further to fall, noting that the United States remains on the short of end of a lopsided balance of trade, with imports outstripping exports by nearly $800 billion at the end of last year.

Regardless of the dollar's value, sales of American goods may be eroded by a more decisive force: a global loss of appetite for goods. "If the rest of the world economy slows, the demand just isn't going to be there," Ruskin said.

That could be painful for American companies that rely on overseas markets. In 2001, large American companies that disclosed foreign revenues logged about a third of their sales abroad, according to an analysis by Howard Silverblatt, senior index analyst at Standard & Poor's. By last year, the international take had climbed to 46 percent. Europe made up 29 percent of the total.

All this means that economic troubles in the United States could intensify into the presidential election season and beyond. It could also make it harder for financial companies like Lehman Brothers — which has been seeking fresh investment in South Korea — and the government-backed mortgage giants Fannie Mae and Freddie Mac to attract much-needed capital from abroad.

As the United States and many other large economies slip in unison, the reality of integrated markets is being underscored: just as globalization spreads prosperity — linking cotton farmers in Texas to textile mills in China — the same forces spread hurt when times go bad.

"The slowdown has reached such a wide range of countries that they're now feeding on one another," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

The impact of the downturn is reflected by the experience of the Vermeer Corporation in Pella, Iowa. The company, which manufactures farming and construction equipment, has become accustomed to looking abroad for growth as the real estate bust in the United States has crimped purchases of its gear by American home builders. Its overseas sales have doubled in the last five years as a percentage of its total business and now make up nearly a third of its revenue, the company's senior director of international sales, Steve Heap, said.

But in recent months, even as growth has continued over all, some parts of the world have sunk into malaise.

"The U.K. has been really soft for the last six months," Heap said. "Western Europe overall has been flat. We've not seen the growth we've seen in the last few years."

Many other major economies are either stagnant or shrinking as well. In Japan, whose fortunes are tethered to exports, the economy contracted at a 2.4 percent annual rate from April through June after accounting for inflation. Germany, another export power, slid at a 2 percent clip. France and Italy slipped slightly.

Spain and the United Kingdom — both grappling with hangovers from their own real estate binges — were both flat amid talk that they have already slipped into recession. The festivity of easy money has given way to recriminations over bad loans, unemployment and inflation.

"The year 2009 in Europe is going to look significantly worse than 2008," said Marco Annunziata, chief economist at the Italian bank UniCredit.

Even China and India, whose swift growth has occasioned talk of a new global order, have been cooling in recent months, though still expanding at rates that would bring envy in nearly any other land.

"We had buoyant world growth for a few years," said William Cline, a senior fellow at the Peterson Institute for International Economics in Washington. "It was too hot not to cool down, as the song goes."

There is a potentially significant upside to the downturn under way: it could knock down rising prices for food and energy, which have been driven higher by swelling demand in a swiftly expanding world economy.

The chairman of the Federal Reserve, Ben Bernanke, has been betting on that very scenario as he has rejected calls for higher interest rates to suffocate inflation.

The recent drop in commodity prices, combined with "a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year," Bernanke said Friday at the Fed's annual economic symposium in Jackson Hole, Wyoming.

Some American businesses say it is too early to worry about a global downturn.

"When I see the headlines, I worry, but when I look at my order book, I stop worrying," said James Griffith, president and chief executive of the Timken Company, a Canton, Ohio, manufacturer of industrial bearings and power transmission equipment with operations in 27 countries.

Roughly half of Timken's bearing business is overseas, cushioning the company against the loss of sales in the American auto industry — a trend Griffith says he is confident will continue.

"When China decides they want to build a car, somebody runs a steel mill with coal and iron ore out of Australia, and they mine it with Caterpillar dump trucks which are full of Timken bearings," Griffith said. "What is driving our success is the globalization of markets."

But lately, even China's leaders have become concerned about flagging exports, altering priorities from seeking to squelch inflation to instead sustaining economic growth. The government is easing restrictions on bank lending, which were imposed to put the brakes on the economy.

When China makes fewer computers, it needs fewer computer chips forged in Taiwan and designed in the United States. It needs less steel, and so less iron ore from Brazil and Australia. Which means those countries need less construction equipment made in Germany, Japan or Ohio.

"The global slowdown is going to create some headwind for the United States," said Stephen Jen, an economist at Morgan Stanley in London.

Keith Bradsher, Carter Dougherty and Heather Timmons contributed reporting.