Sunday, May 01, 2005

The Global Locomotive Loses Steam America's economy: [America's...] "[e]conomic growth, 3.1% for the first quarter, according to an estimate released on Thursday April 28th, may not be quite as fast as the nation has got used to...But it doesn't compare to the economic era between the first oil shock in 1973 and the successful assault on inflation by Paul Volcker, the then Fed chairman, in the early 1980s. That period saw three recessions, double-digit inflation and unemployment mostly in the 6-10% range. Now, America is seeing moderate GDP growth, moderate core inflation (3.3% for the three months to March) and a 5.2% unemployment rate. Even oil prices are less painful than in the bad old days: in real terms, they were nearly twice as high in the 1970s.

But if the hour of doom is not quite at hand, there are still good reasons to worry. Though a 3.1% growth rate would be envied in most European countries, it is probably still below the natural rate at which America’s economy can grow without touching off inflation; that rate is estimated to be 3.5-4%. The rapid pace of America’s economic recovery, and its voracious appetite for imports, have been among the strongest pillars underpinning global growth in recent years. Of the other big economies, only Britain is in relatively good health; France, Germany and Japan are ailing. But should America falter, Britain’s economy is neither big enough nor sufficiently import-hungry to take up the slack.

Still, if the future looks darker than the recent past, this may be because in many ways the recent past has been unusually bright. While Alan Greenspan, the Fed chairman, did not quite engineer the “soft landing” that many had hoped for at the height of the boom, he has presided over a slowdown that could barely be called a recession, and a quick recovery. Cheap Chinese imports have helped America avoid the high inflation that would otherwise have been the natural result of the extremely low interest rates enjoyed since 2001. Those low rates have also enabled Americans to increase their spending without increasing their incomes. Tax cuts, financed by foreign investors who buy American bonds at bargain rates, have even put a little extra money in their pockets. After such halcyon days, it is undoubtedly hard to return to modest growth and consumer spending. But barring an oil shock or some other external crisis, Americans can keep their bellbottoms in the wardrobe."

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