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World's Economy Slows to a Walk in Rare Lockstep

Joseph Kahn with Edmund L. Andrews.
Produced by
The New York Times

WASHINGTON. The world economy, which grew at a raging pace just last year, has slowed to a crawl as the United States, Europe, Japan and some major developing countries undergo a rare simultaneous slump.

The latest economic statistics from around the globe show that many regional economic powers ? Italy and Germany, Mexico and Brazil, Japan and Singapore ? have become economically stagnant, defying expectations that growth in other countries would help compensate for the slowdown in the United States.

The $33 trillion world economy is still likely to expand this year, as it has every year since the Great Depression. Of the top economies, only Japan's total output seems likely to shrink, and even bearish forecasters expect the world to grow at about a 2 percent rate, a bit faster than during international slumps in 1982 and 1991.

Still, many experts say the world is experiencing economic whiplash, with growth rates retreating more quickly and in more of the leading economies than at any time since the oil shock of 1973. And this time there is no single factor to account for the widespread weakness, persuading some economists that recovery may be slow in coming.

"We have gone from boom to bust faster than anytime since the oil shock," said Stephen S. Roach, the chief economist of Morgan Stanley, a New York investment bank. "When you screech to a halt like that, it feels like getting thrown through the windshield."

The biggest surprise is the sluggish performance in Europe, especially Germany, where leaders had until recently thought that they could escape the American slowdown.

Germany's economy, Europe's largest, came to a standstill in the second quarter of this year. Italy and the Netherlands are showing practically no growth. And France's relatively frothy economy has slowed sharply as both consumers and businesses have cut back spending.

One result is that Europe, with a combined economy about as big as that of the United States, is in no position to take over as the locomotive of world economic growth.

"On balance, I'd say that the likelihood of continued difficulties here and abroad is higher than the prevailing view of most economists," said Robert E. Rubin, the former treasury secretary who is now chairman of the executive committee at Citigroup .

The Bush administration still puts a relatively bright gloss on the picture. Administration officials say the combination of tax rebates, a sharp drop in interest rates and minimal inflation should provide a powerful stimulus to consumer spending and business investment that will help the American economy turn around later this year or early next year.

In its latest forecast to be issued formally this week, the White House sharply reduced its estimates of domestic growth this year to 1.7 percent from the previous estimate of 2.4 percent; those levels are well below the growth rates of recent years.

But the White House expects a sizable swing next year, forecasting growth of 3.2 percent then. That suggests that America could serve as the growth engine for the rest of the world as it was through much of the 1990's.

R. Glenn Hubbard, chairman of the White House council of economic advisers, said the slowdown among America's peers was worrying. But he also said that the reasons for weakness were idiosyncratic, varying from place to place, and that there was no reason to expect that international problems would drag the United States or Europe into recession.

"It might feel like a recession in some places," he said, "but I don't see an outright recession here or in Europe."

Not long ago the United States hoped to have more help. European policy makers confidently predicted last spring that the region would grow at about its long-term potential rate of 2.5 percent. They also acted as if they were certain that their new common currency and the growing economic integration of Europe made the region more independent and less vulnerable to outside economic turbulence.

But as events unfolded, they were blind-sided by problems right at home. Domestic demand for consumer goods and industrial machinery around the region is so tepid that it offers no source of growth at all. European companies seem convinced that the real future growth markets are not at home but in the United States, Asia and Central Europe, so domestic investment has lagged. Many forecasters now predict that growth will be less than 2 percent this year, not much better than the United States.

What is striking about Europe's slowdown is that so much of it is linked to domestic weakness, what Daniel Gros of the Center for European Policy Studies describes as long-term "speed limits" on European growth. Exports are actually slightly ahead of last year, which was one of spectacular growth. Yet consumers at home are clutching their pocketbooks. BMW's worldwide sales, for instance, were up 9.7 percent in the first half of this year, but up only 1.1 percent in Germany.

Higher energy and food prices are one big problem for the region. Partly because of a perceived inflation threat, the European Central Bank has resisted intense political pressure to cut interest rates, though it may do so this fall. Relatively high interest rates have put the brakes on regional economies.

But Thomas Mayer, a senior economist at Goldman Sachs in Frankfurt, said price shocks were only part of Europe's woes. He also faults the unwillingness of political leaders to liberalize the labor markets and give employers more freedom in hiring and firing. France and Germany have taken steps to bolster the power of unions and make it more difficult for companies to lay off workers.

"That is the sort of thing we should especially try to avoid right now," Mr. Mayer said.

Closer to home, Mexico has been in recession since April, with its economy shrinking for the third straight quarter. Brazil, the largest Latin American economy, has suffered soaring interest rates and a persistent energy crisis. It is now teetering on the brink of contraction, official estimates show.

The situation in Asia looks no better. Singapore, one of the region's most advanced and open economies, has tumbled into a severe recession that some economists say is the worst the island nation has suffered in at least 15 years. Japan once again slipped into recession territory as its government battles stubborn deflation. Nearly every other major economy in the region, with the notable exception of China's, has seen growth plunge despite months of interest rate cuts.

While many economists do believe that this downturn is cyclical, there are at least two schools of thought that suggest that a more problematic and longer-lasting slump is under way.

(c) Copyright: The New York Times

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