Global Woes May Hit U.S. Economy

Portending a tough time ahead for California exporters, the global economy is limping into the new year weighed down by the threat of war in Iraq and held back by tepid growth from Europe to Asia.

The lack of a strong driver in the coming year raises the risk that the world economy could lose its momentum or even slip into recession, the World Bank warned in its latest economic scorecard. Nicholas Stern, the bank’s chief economist, had held out hope for a stronger rebound, but recent events have prompted him and other analysts to lower growth projections for 2003.

“The recovery has been much more hesitant and uneven than we expected,” Stern said.

The domestic front also is fraught with uncertainty. Heading the list of worries at home, business experts say, is the possibility that a military conflict in the Middle East could trigger a spike in oil prices or a new wave of terrorist attacks.

If a war in Iraq dragged on, it could spook U.S. consumers whose spending has kept the nation’s economy and its trading partners from sliding into recession.

“The biggest single vulnerability right now is oil and geopolitical issues,” said Stuart Schweitzer, chief global investment strategist for J.P. Morgan Fleming Asset Management in New York. “The other big issue concerns the U.S. consumer.... It is legitimate to ask how long the consumer can keep going.”

Such uneasiness was heightened after the retail sector reported that the holiday shopping season was the worst it had experienced in decades.

If the global economy can’t count on the United States to propel growth, neither can American businesses rely on many others around the world.

Though the Bush administration is pushing hard to wrap up trade agreements with Chile and Singapore by early next year, overseas sales are unlikely to be a major source of strength for U.S. firms because their biggest customers in Asia and Europe are struggling.

The only cause for cheer is a recent weakening of the dollar, which makes U.S. goods cheaper overseas. But since products are ordered months in advance, it takes time for currency shifts to have an effect on trade flows.

Sluggish exports are especially worrisome for trade-dependent California, whose major industries -- technology, aerospace and agriculture -- count heavily on foreign sales. Through October, California’s exports were down 15.3% compared with the same period a year ago.

That included declines of 26% to Japan, 18% to Canada and 24% to Britain. Even sales to China, the world’s most promising area of growth, were off 8%.

“If there were additional movement in the dollar, that could be especially helpful,” said Thomas Duesterberg, president of the National Assn. of Manufacturers, a Washington trade group. “We don’t expect -- at least in the first half of the year -- for Europe, Japan or Latin America to be a source of strong growth.”

The first half of 2003 is likely to be particularly difficult for Japan. The world’s second-largest economy is threatening to slide from slow growth to no growth. Meanwhile, Germany, Europe’s largest economy, is saddled with rising unemployment and widespread business discontent, according to analysts.

Although growth by region is expected to vary widely -- from 1.8% in Latin America to 6.1% in East Asia -- the World Bank is projecting that global gross domestic product will rise by 2.5% next year, up from 1.7% in 2002 but well below the 3.9% expansion in 2000.

The uncertainty of the Iraqi situation already has imposed a “war premium” of $5 to $6 per barrel of crude oil, said Gerard Walsh, director of economics at London-based research firm Economist Intelligencer Unit.

Higher oil prices translate into bigger energy bills for businesses and consumers and more expensive gasoline. If the war premium lasts for as long as a year, it could shave at least 0.2% off global growth, he said. Particularly vulnerable are Asia’s largest economies, which depend heavily on imported oil. Japan buys 86% of its oil from the Middle East.

China, however, is emerging as an exception in an otherwise gloomy picture. Its economy, although small compared with that of the United States, is expected to continue a robust expansion propelled by an estimated $50 billion in foreign investment that poured into export-oriented manufacturing companies, automakers, steel producers and others in 2002.

“Where Japan’s leadership has difficulty dealing with the past and still has its back turned to the future, China has embraced the future,” said Kenneth Courtis, vice chairman of Goldman Sachs Asia. “China’s leadership understands if it can’t generate this growth, it won’t stay in power.”

China’s growth has huge benefits for a region whose primary engine, Japan, has been stalled for more than a decade. To fuel its export factories, China has dramatically increased its imports, particularly of raw materials and components. This year, South Korea, Singapore and Taiwan will ship more goods to China than to Japan, Courtis said. But in a stagnant world economy, much of China’s manufacturing growth will come at the expense of less competitive developing countries in Asia and Latin America.

“China is an important new competitor for growth prospects for both Eastern and Western Europe and for Latin America, for Russia and for some companies in the U.S.,” said Donald Straszheim, president of Straszheim Global Advisors, an economic consulting firm in Los Angeles. “The defense of the status quo is going to become more difficult, not less.”

South of the U.S., the downside pressures are enormous.

Maquiladoras, the border factories dependent on exports to the U.S., have lost tens of thousands of jobs to lower-cost competitors in Asia, particularly China. Under the North American Free Trade Agreement, tariffs will be lifted on almost all U.S. agricultural commodities Jan. 1, and Mexico’s long-protected farmers are bracing for an onslaught of cheap U.S. meats and other farm goods.

In South America, Brazil and its neighbors are struggling to contain the repercussions of Argentina’s currency collapse and the political strife that has paralyzed Venezuela’s oil industry.

Richard Feinberg, an international relations specialist at UC San Diego, said the Bush administration has changed its tune on Brazil’s new leftist leadership, recognizing that a collapse in South America’s largest economy could damage the bottom line of U.S. financial institutions. The U.S. government has supported the International Monetary Fund’s $30-billion bailout package for Brazil, and President Bush invited Brazilian President-elect Luiz Inacio Lula da Silva to the White House this month.

“When the economy is already wobbly, the one thing the Bush administration wants to avoid where it can is any additional negative shocks,” said Feinberg, who served as the Clinton administration’s point man on Latin America.

Maintaining international confidence in the U.S. economy is vital, since foreigners have supported America’s spending spree by pouring their funds into U.S. Treasury bills and equity markets. Just to offset its current account deficit and maintain the dollar’s value, the U.S. needs to attract $1.4 billion a day in foreign capital. In recent days, worries about the uneven U.S. recovery and the prospect of war have depressed the dollar’s value against the euro and the yen.

Growing European uneasiness over the U.S.-led campaign against Iraq also may be slowing investment flows into the U.S., said Joan Payden, chief executive of Payden & Rygel, a Los Angeles investment management firm with a focus on Europe.

“I think some flows from an investment standpoint are somewhat emotional right now,” she said. “Europe does not like what we’re doing in the Middle East.... The sentiment overseas is very negative. I think it’s a short-term phenomenon, but it might affect flows into this country.”

Though the 12-nation European Union has hit a rough spot, Payden believes that the collapse of the equities markets in those nations has created opportunities for U.S. investors to pick up solid companies at rock-bottom prices, particularly in insurance and health care.

Payden’s firm, in partnership with Metzler Bank, the oldest private bank in Germany still owned exclusively by the founding family, is launching five mutual funds focused on Europe, including the Eastern European countries that are lined up to join the euro zone. Also in their sights is Russia, whose struggling economy has gotten a boost from higher oil prices.

“I don’t think people look enough for diversifying both geographically as well as sectors,” she said.

Though another year of bumping along at the bottom is likely, there also is the possibility that the global economy could get a confidence-building “surprise on the upside,” such as a major success in the U.S. war against terrorism, said Gary Hufbauer, a trade specialist at the Institute for International Economics in Washington.

“That would put a very different perspective on everything,” he said. “I think a lot of firms are holding back investment for fear of another wave of terrorism.”