North America Will Drive Global Economic Recovery This Year
Press release from the issuing company
But U.S. Is Not the Growth Engine of the Late 1990s
NEW YORK, June 18 -- North America, with the U.S. leading the way, will drive the global recovery this year, according to a three-nation study released today by The Conference Board, Inc., The Conference Board of Canada and Centro de Estudios Economicos del Sector Privado A.C. of Mexico. But the turnaround is likely to be modest.
The North American economy began this year recovering from its first recession in more than a decade. The weighted average of growth in the U.S., Canada, and Mexico slowed to just 1.2% last year, from 4.2% in 2000. The regional downturn had a considerable impact on the global economy, slowing growth to 2.5% last year from 4.7% in 2000.
All three economies in North America contracted in the third quarter, but Gross Domestic Product growth in the U.S. and Canada quickly rebounded during the fourth quarter of last year. Although the Mexican economy is lagging those of its northern neighbors, growth should turn positive by the second quarter of this year. As a result, regional growth is expected to accelerate gradually over the course of 2002, but increase just 2.4% for the whole year. Growth will rebound to 3.9% in 2003 as the North American recovery gathers momentum.
"A key risk to the North American outlook is the ongoing reliance of the global economy on U.S. demand," says Gail D. Fosler, Senior Vice President and Chief Economist of The Conference Board, who co-authored the report with Thomas D. Higgins, Managing Director of Geoffrey Bell and Company. "The U.S. economy is simply not the engine of global growth that it was during the late 1990s."
This year, domestic demand is expected to grow just 3.4% and U.S. import growth is expected to be weak. Even after the U.S. economy returns to full strength in 2003, it's unlikely that Americans will be able, as they did in the late 1990s, to resume the role of buyer of last resort in the global economy.
International trade, and especially capital flows, will take time to recuperate, reducing growth prospects in most developing countries. Asia (excluding Japan) will be the notable exception to this rule. Countries such as Singapore and Taiwan are already well integrated into the U.S. supply chain for technology products, and will benefit from the recovery underway in this sector.
Growth in Latin America, on the other hand, will remain sluggish given the regional dependence on foreign capital inflows. Countries such as Argentina and Brazil need to find alternative ways to finance domestic investment and economic growth. Overall, global growth is expected to increase 2.8% this year and 4% in 2003.
U.S. RECOVERY WELL ESTABLISHED
The U.S. economy has shown remarkable resilience in the face of the events of September 11th. The 2001 recession was one of the mildest and shortest on record. Barring any downward revisions to past data, U.S. GDP growth will have posted only one quarter of decline during the recession. After falling at a 1.3% annual rate in the third quarter of last year, GDP growth rose 1.7% in the fourth quarter of last year and surged 5.6% in the first quarter of 2002, due to a swing in inventory investment.
While U.S. consumers managed relatively well during the recession, businesses bore the brunt of the downturn. Non-residential fixed investment declined at an annualized rate of 13.8% in the fourth quarter and averaged a decline of 12% between March and December. At the same time, tight margins and a lack of pricing power caused corporate profits to drop 21% peak-to-trough on a National Income and Product Account basis.
But the outlook for investment and profits is improving, and business is expected to lead the recovery this year. Although business investment continued to decline in the first quarter, the rate of decline slowed to 8.2%. In addition, businesses are lifting production to replenish depleted stocks following the record inventory drawdown at the end of last year. In the first three months of 2002, industrial production posted its first consecutive monthly increases since April-June 2000. Also, healthy gains in productivity will provide huge profit leverage as the industrial sector recovers. Productivity growth accelerated to an 8.6% annual pace during the first quarter of 2002.
The combination of increased production and higher profit margins should result in a turnaround in business investment this year. One positive sign is the rebound in new orders for technology that extends across the key tech sectors. Since the downturn in information and communications technology led into the recession, the pickup in computer spending may be an early signal of a turnaround in total business spending.
GDP growth will increase only modestly, to 2.4%, but a gradual pickup in activity will boost fourth quarter growth to an annual rate of over 3%. This recovery should set the stage for a return to 3.8% growth in 2003.
CANADA AND MEXICO ARE ALSO RECOVERING
There was some concern at the start of the U.S. recession that Canada and Mexico would suffer disproportionately because of their closer ties to the U.S. under the North American Free Trade Agreement (NAFTA). This assumption seemed reasonable, since Mexican and Canadian exports to the U.S. account for about one-quarter and one-third of GDP, respectively. Also, both countries are highly integrated into the U.S. production chain for automobiles, which, along with the technology sector, was hardest hit by the U.S. recession.
But the downturns in Canada and Mexico were unusually mild by past standards. The increasing integration of North America has resulted in a more synchronized business cycle across the continent, as well as reduced volatility among the major macro-economic indicators. This trend is expected to continue over the next two years.
The Canadian economy outperformed the U.S. economy last year, growing 1.5%. There is even some question as to whether the slowdown in Canada actually qualified as a recession. Nevertheless, the country is rebounding in concert with the U.S. economy. Canadian consumers, like their U.S. counterparts, have maintained remarkable buying levels during the downturn. Consumer spending is expected to strengthen gradually over the course of the year, reaching an annualized rate of nearly 4% in Canada by year's end. This strengthening trend will set the foundation for the expansion to move into full swing in 2003, with GDP growth forecast to increase at an annual rate of 4.5%.
Mexico experienced a sharper contraction than either the U.S. or Canada, and its recovery has been slower to materialize. But, preliminary signs indicate that the economy has turned the corner and will begin growing again by the second quarter of this year. The Conference Board's Leading Index for Mexico rose 0.3% in January and 0.1% in February, with rising oil prices and declining inventories responsible for much of the gain.
Strong ties to the U.S. and a balanced policy mix have allowed Mexico to decouple itself from Latin America. Despite the meltdown in Argentina, the Mexican peso appreciated six percent against the U.S. dollar last year, as international investors began to see Mexico as a safe haven. This year, GDP growth in Mexico will reach 1.5%, preparing the way for a more robust recovery to annual growth of around 4% in 2003.
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