Serious Slowdown of the Global Economy

After almost ten years of dynamic expansion, the U.S. economy took an abrupt turn in 2000, its growth declining from over 5 percent in the first half to 1 percent in the fourth quarter. Manufacturing entered a period of contraction, whereas the services sector continued to profit from private household demand which was still holding up. Aware of the pending risks, the Federal Reserve has since been cutting its interest rate fully five times in a row, by altogether 2.5 percentage points. The cheap money allowed consumers in particular to splurge on credit-financed consumption. While this helped to boost growth to 1.3 percent in the first quarter of 2001, the personal savings ratio, already at a negative level in the past, continued to drop. The stuttering economy caused productivity growth to stagnate in the first three months and unemployment to soar. Company surveys found that no turnaround is in sight and that the spectre of recession is still looming. Countries with strong economic ties to the USA are already registering a distinct dip in their exports. Exports by euro zone countries, on the other hand, were not much affected, thanks to the low euro/dollar exchange rate. Hopes that the higher growth rate in 2000 would signal a sustained recovery of the Japanese economy have been dashed by the latest company surveys. Driven primarily by exports in the first half of 2000, the economy suffered a damper as a result of slackening growth in the USA and the precipitous decline of international demand for IT products. Private expenditure continues to be moderate since labour market prospects are still bleak. Job uncertainty puts a check on consumption by private households. In spite of rising oil prices, the Japanese economy last year was unable to extract itself from the deflation spiral. In 2000, GDP in the euro zone and in the EU-15 states rose by 3.4 percent and 3.3 percent, respectively, in real terms, compared to 2.5 percent each in 1999. After briskly expanding until summer, the EU economy lost some of its momentum for the rest of the year. The slightly lower dynamism, however, was not due to its foreign trade, as would be logical when considering the drastic cooling of the U.S. economy, but primarily the result of a slump in domestic demand. Demand for investment suffered from a generally more restrictive monetary policy and a gloomier international outlook. Weakening domestic demand was most pronounced in private consumption. The high oil price, combined with a low euro/dollar exchange rate, impacted on disposable private households incomes and checked the pace of their expenditure on consumption. The economic slowdown was most noticeable in Germany, where private consumption showed hardly any increase in the first quarter of 2001 in spite of tax cuts amounting to 1 percent of GDP, and investment in plant and equipment is similarly reticent. The German construction industry is seriously affected. Its long-standing crisis was accelerated in the first three months of 2001. Surveys find that the downswing experienced throughout the EU is expected to continue on its downward course.

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