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Wednesday, Jun 05, 2002

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Global economy may get fillip from US growth

S. Balakrishnan

THE second half of 2002 should see the global economy gain momentum.

The portents are good in the US, Japan and Europe. Japan is at last looking set to move into positive growth territory. US data has been uniformly good for several weeks and Euroland is now following suit, albeit not so strongly. The latter's confidence numbers have improved and forecasts are that the economies of the twelve countries forming the single European currency will pick up pace in the coming months.

The recovery from September 11 has been surprisingly fast and good. Confidence was at a low ebb in the immediate aftermath of the terrorist attacks but bounced back vigorously, especially in the US, even in the last quarter of 2001. This enabled the US economy to stave off a recession, officially defined as two successive quarters of negative growth.

Europe has been slower to come out of hibernation. Unlike the US Federal Reserve, its European counterpart, the ECB, did not cut interest rates pre-emptively. It is still fixated on monetary targeting and inflation. Besides, while the US central bank is enjoined to promote employment and growth in addition to price stability, which gives it greater freedom in setting monetary policy and interest rates compared to the ECB, whose mandate is limited solely to achieving an inflation target.

Making life more difficult for the ECB are Europe's structural rigidities characterising its labour market and competition policies. These result in a higher and an inelastic cost structure and enable cost increases to be passed on unlike in the US where markets are much more free and work to the advantage of consumers, keeping inflation low. This has made the task of the Fed that much easier. It did not have to worry about cost-push inflation. Businesses had to absorb higher costs by becoming more efficient or go out of business.

Japan is still a question mark but has seen export-driven growth in recent months. The big question is whether the Japanese consumer will unloosen his wallet. The country's negative inflation rate has not exactly been conducive to spending by consumers and businesses.

The US slowdown has hit the rest of the world badly. The export economies of East Asia — South Korea, Taiwan, Singapore, Philippines and Thailand — were particularly affected. The revival of the US economy is extremely good news for them. Their currencies have pushed upwards in recent weeks smelling a return to good days.

The US job market should soon be hitting a bottom. Stock prices will get a lift from a combination of better corporate profits and the stimulus of extremely low interest rates. Economic, corporate and market prospects have not looked better for months.

Once again, the rising tide in US must power the other boats in Europe and Asia, including Japan. Once war fears dissipate, the Indian market too is due for a sharp and sustained rally.

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