This is something that carmakers such as Ford, General Motors, Honda and Toyota – who have struggled to make a profit in Europe – probably already know: a New York Times report said the United States and Asia are leaving Europe behind in an accelerating, but uneven global economic recovery.
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The NYT said that was the assessment of the Organisation for Economic Cooperation and Development (OECD) when it released its semi-annual outlook on Tuesday.
The paper said the organisation raised its growth forecast for the United States, while cutting its outlook for Germany and Italy and reportedly prescribed opposite remedies to help narrow the economic divide: an increase in interest rates by the Federal Reserve and a cut by the European Central Bank.
“Asia and North America are racing ahead, but Germany and Italy are struggling to revive their economies,” Jean-Philippe Cotis, chief economist of the OECD, an organisation of 30 countries, told the New York Times.
This disparity, which has been deepened by economic policies on both sides of the Atlantic, reportedly could threaten Europe and Japan with further spikes in the exchange rates of their currencies versus the dollar.
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By GlobalData“You could have a turbulent exchange rate adjustment,” Cotis reportedly said in an interview, adding: “That would hurt Japan and Europe.”
A declining dollar could stoke inflation in the United States, Cotis said according to the NYT, which would prompt the ‘Fed’ to embark on a long-expected tightening of monetary policy. That step could be jarring, he reportedly warned, if the White House does not scale back its spending and tackle the deficit.
The paper said the troubles in the American economy pale beside those in Europe, which fell harder, and is recovering more slowly, than any other major economic bloc.
The OECD reportedly predicts that the 12-nation euro zone will grow just 1.6% this year, compared with 4.7% in the United States, while Japan, once the economic sick man of the world, is projected to grow 3%, nearly double Europe’s pace.
Germany, where consumers remain in near paralysis, is expected to grow only 1.1% in 2004 and Italy, which has suffered from an eroding competitiveness of its exports, may grow just 0.9%, the New York Time said.
The paper said the most humbling fact for Europeans is that so far, their woes have had little effect on the global economy, in part because Asia has grown in importance as a trading partner for the United States.
“Being a Frenchman and a European it hurts me to say it, but it is true: Europe is not indispensable to this recovery,” Cotis reportedly said.
The NYT said there was fresh evidence of Europe’s struggles at a meeting of finance ministers in Brussels on Monday where the German finance minister, Hans Eichel, warned the European Commission that Berlin might not fulfill its promise to pull its budget deficit below 3% of its gross domestic product by 2005, as mandated by the Maastricht Treaty, which created the monetary union.
Germany, which has breached the deficit cap for three consecutive years, said it could not risk having spending cuts choke off a recovery, the New York Times said, adding that the government has also been hit with an unexpected shortfall in tax revenues, prompting a new spate of rumors in Berlin that Eichel may be replaced.
“The recovery is there,” he reportedly said, “but it’s not so robust that we can already touch the brakes. We first need firm ground under our feet.”
The paper noted that Italy, which is also on track to violate the deficit limit in 2004, avoided being issued a warning letter by the commission after the Italian economics minister, Giulio Tremonti, promised to stem the tide of red ink, winning the backing of his beleaguered colleague, Eichel.
The New York Times said that, in many ways, Europe was the gloomy exception in the OECD report: Cotis reportedly said the recovery in the United States and Asia was “strong and sustainable” while early fears that the rebound was not generating new jobs in the United States no longer seem warranted.
Cotis reportedly took issue with two popular themes in recent economic analysis: that moving jobs to low-wage countries is to blame for the weak job environment in the United States, and that China is overheating.
“Outsourcing may be a good scapegoat,” he said, according to the New York Times , “but it doesn’t explain why job creation has been below expectations.” He reportedly said that moving jobs offshore was a “smallish” phenomenon, and that the weakness in the job market reflected corporate retrenchment after the buoyant 1990s.
China’s economy, he acknowledged to the newspaper, is “close to overheating” but he believes that the Chinese leaders have averted the worst danger by moving quickly to tighten credit.
Japan and South Korea, meanwhile, have hugely benefited from the breakneck growth in China because China has been a major buyer of Japanese and Korean machinery, as well as a prolific exporter, the New York Times said.
The newspaper said the wild card in the OECD’s forecast is rising oil prices. If recent high prices persist, Cotis reportedly said, it would cut his global growth projections by 0.2%. Still, he reportedly counselled calm. “There has been quite a bit of overreaction to the recent moves in oil prices,” he told the New York Times.
