Thursday was an unhappy day for animal lovers: bad news on both hare and tortoise. In the United States the four-week moving average for new jobless claims in the week ending Oct. 6 rose to 463,000, the highest level since December 1991, when the U.S. economy was in recession; the hare is struggling. As for the tortoise, his weary crawl slowed almost to a stop. In the second quarter of this year, the euro-zone economy, we learned Thursday, grew by only 0.1 percent on the previous quarter.
Those who remember the latest headline figure for U.S. growth of 0.3 percent in the second quarter, released on Sept. 28, may be inclined to think the hare, even in his current state, is outrunning the tortoise, but in fact they are now running neck and neck after a period in which the tortoise has led the way.
The United States annualizes its quarterly growth number (raises it to the power of four to give an annual equivalent). Presented without annualization, U.S. growth was 0.1 percent in the second quarter, identical to that in the euro-zone.
Another measure of growth, one for the past year, gives the advantage to the European tortoise. By comparison with the second quarter of 2000, the euro-zone economy grew by 1.7 percent, the U.S. one by just 1.2 percent. Over a twelve-month run the tortoise has outpaced the hare. But is the hare now catching up? And is it ready to overtake?
The markets think so. The first indication of this is the recent move in the dollar/euro exchange rate. The euro is at 90.2 U.S. cents as we write, down from its recent highs of close to 93 U.S. cents in mid-September. That is not a big move in the often volatile world of the currency markets but it is a very disappointing one for the euro which had been recovering from its 83 U.S. cents low of July 2000. The euro/dollar exchange rate is a barometer of the markets' assessment of Europe relative to the United States. The bets are beginning again to favor the American hare.
Another barometer; the stock market, driven by "animal spirits," as the great economist, John Maynard Keynes asserted, is not the best measure of anything underlying. But in coming weeks we would expect the bullish rise in the U.S. stock market from the precipitous post-September 11 drop to continue. What is driving this new upward momentum, which has taken the Dow up by 14 percent since its three-year low Sept. 21 of 8,236, is, certainly, relief that no more terrorist attacks have occurred and a belief that the market dropped too far following the September 11 terrorist attack. But, more importantly, the market is reviving because of a belief in "recovery in 2002." The hare will be running again soon, the markets believe. But are they right? And are they right to favor the tortoise over the hare?
The tortoise is tortoise-like even in policy-making. Even after the bad news on European growth, the European Central Bank announced Thursday after its regular fortnightly monetary policy meeting that it would not cut interest rates. The ECB refinancing rate remains at 3.75 percent, 1.25 percentage points above the U.S. Federal Funds Rate, despite the fact that euro-zone inflation, at 2.7 percent, is identical to that in the United States. Moreover though annual broad money growth in the euro-zone, at 6.6 percent, is a couple of percentage points above the level at which the ECB would like it, it is still way down on the 10.9 percent broad money growth in the United States, where that sprightly hare of a veteran, Alan Greenspan, runs policy from the Federal Reserve warren in Washington.
Why is the ECB not rushing to cut rates? One reason would seem to be that it remains keen to achieve lower inflation and greater convergence in economic performance in the euro-zone. Growth and inflation rates vary widely in the region. The French economy grew by 2.3 percent on a year earlier in the second quarter, the German one by only 0.6 percent. Inflation in countries is still way above average. In The Netherlands it is still 4.7 percent (in September), in Ireland 4.6 percent, in Spain 3.7 percent. The second reason is confidence: the ECB still seems confident about European prospects.
"We do not have the feeling that Europe is on the verge of recession," the ECB President, Wim Duisenberg, said Thursday.
That confidence may be a little overdone. The ECB has tended to underestimate the extent to which slowdown in the United States will hurt Europe. Yet it does have grounds for supposing that the euro-zone will not follow the U.S. economy into outright recession.
Fiscal policy in Europe has been supportive of domestic demand. There have been tax cuts this year in France, Germany and Italy. (Private consumption in the euro-zone rose at a healthy annualized rate of 3 percent in the first quarter.) The easing of the oil price means that consumers will have a little more money in their pockets. All these factors are positive--and all of them are shared by the U.S. economy.
It is in another regard that the euro-zone economy has advantages over its transatlantic rival: it has not bubbled as much. The boom in investment, consumption, growth, stocks and lending that took place in the United States in the second half of the 1990s all have echoes in the euro-zone, but the echoes are less loud. Some European stock markets, such as Germany's DAX, boomed, but far fewer Europeans own shares and the wealth effect has been much less pronounced. "You've got it, baby, flaunt it, flaunt it," shouts Zero Mostel to a big shot in the film The Producers; in Europe there has been less to flaunt. That has been apparent in Europe's lower growth, higher unemployment and, more positively, higher personal savings rates and balanced external position.
Meanwhile, Americans have been spending heavily and borrowing amply and the United States are running huge trade and current account deficits. Having bubbled less, Europe ought to have less excess to cope with.
Commenting on the current economic downturn, the ever-perceptive Han de Jong, head of asset management at the Dutch bank, ABN AMRO, writes "the current business cycle is different from all other cycles during the last 50 years." Whereas "previous cycles have been driven by the inflation cycle," this time "the profit cycle has dictated developments." There has been over-investment in the world economy, and, most of all, in the U.S. economy, into which much capital flowed from Europe in the second half of the 1990s, feeding the boom. "In every downturn," de Jong writes, "capacity utilization rates fall, and creating excess capacity, but this should perhaps be called cyclical excess capacity, while we now have structural excess capacity on top of it."
It is this "structural excess capacity," as de Jong puts it, that must now be feared. It may have a precedent, as Professor Milton Friedman said to UPI this week, in the 1920's boom in the United States and the 1980s one in Japan, both of which were followed by slump. The risk of slump may be what has encouraged Greenspan to slash rates fast, boosting U.S. broad money supply growth to double-digit levels. But the degree of excess capacity in the U.S. economy that must be corrected has so far meant that these interest rate cuts have had little effect--though, it is true, this may also reflect the fact that interest rate cuts need time to work.
In the global economy now we are in barely charted territory and this creates room for doubt. Yet our view on the U.S. economy continues to be firmly negative. Its boom was allowed to go unchecked for too long, distorting the economy. It will take a long time to bring output, employment, profits and debt, as well as the relative prices of stocks and property, back to reasonable levels. It will take time, too, to reduce the external deficit in a world economy that slows when the United States slows.
Tortoise-like Europe is a big part of the reason for that. Its pace of growth is consistently disappointing. But the tortoise, unlike the hare, has not run itself into the ground. It will have a year of modest growth in 2002 but we see far greater distress in the exhausted United States. The U.S. stock market rally will go on for a while, we think, but ultimately it is hare-brained and will play itself out. The euro looks set now to weaken further but will eventually make ground on the dollar. This is a race the tortoise is going to win--without ever impressing.
(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments welcome. email@example.com.)