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US Economic Recovery Discussed at Davos Economic Forum - 2004-01-24


The more than 2,000 business executives, government officials, academics and representatives of civil society are attending the World Economic Forum this week in Davos, Switzerland. They are getting first-hand briefings on such issues as peace in the Middle East and nuclear proliferation from world leaders. The main question is whether the budding economic recovery in the United States will continue.

It is the main topic of discussion nearly everywhere at the forum, most of whose guests are top corporate officials. Will the U.S. economy recover strongly enough to help the rest of the world, especially Europe, where growth has been more modest-pull out of the economic doldrums?

Some worry that the recovery has not resulted in the creation of new jobs. Others worry that U.S. budget and trade deficits may be undermining the dollar.

There are optimists, and there are pessimists. Although U.S. Commerce Secretary Don Evans says the U.S. economy will keep growing and is just starting to create new jobs, economists and economic analysts are more cautious.

But everybody seems to recognize that the six-month-old upward trend in the U.S. economy is the only positive sign seen so far that the clouds over the global economic outlook are lifting.

Stephen Roach, chief global economist at Morgan Stanley, a leading New York investment bank, says it is hard to say what is going to happen in the months ahead.

"The world economy is still a one-engine show, and the engine is America," he said. "America doesn't only have a job problem and an income problem associated with a lack of job creation, but we've got a massive balance of payments deficit, a record-low national savings rate, record-high levels of consumer indebtedness, and a runaway budget deficit. And, to me, these are not the ingredients of a sustainable, vigorous recovery. We've had a good upturn in the last six months, but I hesitate to extrapolate into the future."

In his State of the Union address, President Bush tried to reassure skeptics with promises to slash the soaring U.S. budget deficit.

"In two weeks, I will send you [Congress] a budget that funds the war, protects the homeland and meets important domestic needs while limiting the growth in discretionary spending to less than four percent," he said.

But European business leaders are worried about a further sharp fall in the dollar that could lead to a steep rise in U.S. interest rates. They fear that would reverse the economic rebound.

Peter Sutherland, chairman of Goldman-Sachs International, another leading investment firm, says U.S. executives with whom he has spoken are mostly confident about the future. But he says Europeans have to be convinced that the recovery is not just a short-term one.

"The real issue for the global economy is the sustainability of growth in the United States," he said. "Are we seeing a temporary boost as a result of fiscal incentives, low interest rates and so on, which is sustainable? And it cannot be denied that there are real macroeconomic issues in regard to the U.S. economy and the deficits. It's all very well to have a boom or the beginnings of a significant growth momentum. The question is, is it sustainable? And that's the big issue for everybody."

Some economists say the best way to deal with imbalances in the world economy would be for policymakers to take collective action toward stabilizing currency markets at a meeting of the Group of Seven industrialized countries next month in Florida. Though European officials are quietly pressing for such action, U.S. officials have been taciturn on the subject, and many analysts say the United States has more to gain than to lose by a weak currency, which makes U.S. exports cheaper on global markets.

U.S. officials say Vice president Dick Cheney will have nothing to say about the dollar when he speaks at the Forum on Saturday.

Mr. Cheney's presence in Davos reminds some analysts of another source of unease: the growing economic cost of stricter border security measures to combat terrorism.

Ken Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund, says that, if anti-terrorism measures were stepped up sharply, the effect on global growth would be staggering. He is also pessimistic about the sustainability of the U.S. recovery.

"I think 2004 may be a bit of an aberration in how much growth there is," he said. "It's going to come down in 2005 and 2006, maybe even to sub-normal levels. We've got deficits to worry about and we have corrections in many asset markets. And I think that growth is definitely going to be a lot less happy in 2005."

Many U.S. executives say they are bullish about the U.S. economy and prospects for a worldwide recovery. They say the U.S. economy is extremely flexible, deregulated and capable of reacting rapidly to any external shocks, in contrast to the European economy. These executives particularly emphasize the growth in U.S. productivity over the past few years, describing it as spectacular.

But others are not so enthusiastic. They still worry about the U.S. deficits and are leery that the recovery could be upset by unforeseen political and economic events.