Survey Of The U.S., Japan, And E.U. - 2003-2004


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There are many interesting and complex components that make up the economies of the United States, the European Union, and Japan, as there would be in any developed economic system. The building blocks that form the foundation of our understanding of these economies are to look at each region in the broader context of three very important macroeconomic themes: output, unemployment and inflation.

The goal of this paper is to summarize the current and unique macroeconomic pictures we saw in each region as of 2003-04; highlight any changes noticed in their macroeconomic conditions since the turn of the 21st century and now; and make a forecast of the anticipated macroeconomic conditions in each of the three regions for the near future based on empirical evidence.

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Survey Of The U.S., Japan, And E.U. - 2003-2004

  1. 1. The Global Economy: Survey of the United States, Japan and European Union, 2003-04 OBJECTIVEThere are many interesting and complex components that make up the economies of the United States, theEuropean Union, and Japan, as there would be in any developed economic system. The building blocks thatform the foundation of our understanding of these economies are to look at each region in the broader context ofthree very important macroeconomic themes: output, unemployment and inflation.The goal of this paper is to summarize the current and unique macroeconomic pictures we saw in each region asof 2003-04; highlight any changes noticed in their macroeconomic conditions since the turn of the 21st centuryand now; and make a forecast of the anticipated macroeconomic conditions in each of the three regions for thenear future based on empirical evidence. THE UNITED STATESIn late 2001, the initial fears of a recession in the world economy faded, as a modest turnaround the followingyear had been anticipated. The world economy has been increasingly dependent on growth in the U.S. economybecause it is the source of nearly one-third of global demand. Unfortunately, these hopes of a turnaround in theeconomy became quickly overshadowed by the many stumbling blocks that consequentially brought aboutlackluster growth throughout the U.S. and beyond. Concerns over the real financial position of corporateAmerica sent shock-waves through the U.S. economy after the controversial bankruptcy filing in December2001 of energy trader and market leader, Enron Corporation. This is the second largest corporate bankruptcy todate in U.S. history, and harbored justifiable fear in investors over the real financial position of corporateAmerica. Like a house of cards, WorldCom also came crashing down in July 2002 as it made the largest filingfor bankruptcy protection ever in the U.S. after buckling under the pressure of a massive scandal involving anearly $4 billion accounting fraud which made the company look profitable when it was not. Other giant firmsunder investigation for accounting irregularities include Xerox Corp., Arthur Andersen, Bristol-Meyers, andJohnson & Johnson.These events exasperated an already serious problem concerning sluggish employment and businessinvestments. Corporate America slashed nearly 250,000 jobs between September 2002 and January 2003, as theglobal economy failed to show signs of a strong recovery from the onset of recession in March 2001. Theunemployment rate increased from 4.8% in 2001 to 5.9% the following year due to the lackluster aggregatedemand for U.S. goods and services by the rest of the world. Pricing powers of financially weak U.S.corporations has also been limited as deflationary pressures in roughly one-third of the world economies hassent prices and wages on a downward spiral. The labor market also appeared to be soft and lackluster,preventing the robust external demand from the U.S. needed to boost growth. Further evidence of globalstagnation is reflected in data collected by the United Nations citing a scant 1.7% expansion in the worldeconomy since 2002, which many economists consider to be very close to bordering a recession. Also, theeconomy-wide GDP implicit price deflator increased by less than one percent for the four quarters through thethird quarter of 2002. The annual GDP deflator has not been at this level since 1949, which is at tell-tale sign ofglobal deflation. 1
  2. 2. Consumer spending increased steadily, assisting the U.S. economy in leading the sustained recovery since 2002,even amidst corporate scandal. Yet, record levels of national debt exceeding over $2.3 trillion (~20% real GDP)has been accumulated as a result and a trade deficit in excess of 4% of real GDP requires over $1 billion a dayforeign capital inflow to compensate for this widening trade deficit. U.S. foreign policy has greatly contributedto a heightening deficit as defense spending increased dramatically upon Americas commitment to fight the waron terror. U.S. military activities in Iraq between January and September 2003 are expected to cost in upwardsof $58 billion, according to top budget officials at the Pentagon. Rebuilding costs for Americas postwarcommitment to Iraq likely will cost as much as $100 billion and take three years to accomplish. The DefenseDepartment has indicated that military actions in Afghanistan are costing Americans $1 billion each month.This raises concern that much of this burden could fall on taxpayers shoulders and cause a drag on theeconomy.The Fed has stepped in to assist in encouraging consumer spending and stimulating overall growth in thelowering of interest rates to 45-year lows of 1.0% compared to 6.0% during the onset of 2001. The central bankintends on leaving rates low for a considerable period, as the impact on the economy takes nine to 18 months tofeel the effects of Fed rate cuts. The fiscal policy, which includes federal income tax cuts, child tax credits andrepeals the double taxation of dividends, has come out at a timely period, as consumer confidence and the labormarket have been consistently lackluster. This supportive monetary and fiscal policy should result in moderategrowth at around 2-1/2% in 2003, rising strongly to 4% in 2004. One concern is how this record deficitspending, which the Congressional Budget Office has put at $480 billion for 2004. This is a very major changefrom the $127 billion surplus of the 2001 fiscal year and the actual impact of such fiscal policy has yet to bemeasured out in the U.S. economy over the coming year. JAPANWhile there has not been a serious economic crisis in the Japanese economy recently, there has not been anymove toward sustainable growth either. Deflation has continued to punish the economy and in July 2002,companies filed for bankruptcy at a rate of 58 per day. This not only caused spikes in the unemployment rate,which was near a post-war record of 5.67%, but it also resulted in consumers and investors fearing a possibleJapanese meltdown. During all four quarters prior to the April-June 2002 quarters, the Japanese economycontracted, which is the first time this has happened since such data began to be collected in 1980. In February2002, the Nikkei 225 dropped below the Down Jones Industrial for the first time since 1957. Also, onSeptember 4, 2002, the Tokyo exchange dropped to its lowest levels in approximately 19 years as the worldmarkets also plunged. Also, prices have fallen for four consecutive years, which is unprecedented for industrialcountries in the last half century. These and other economic indicators are reflecting the economic stagnation inJapan throughout 2002. In fact, banks have actually shrunk the amount of credit being generated in the form ofloans due to the estimated 150 trillion yen in bad outstanding loans according to the Financial Services Agency.Also, the deflation has limited the monetary flexibility of the Bank of Japan, which is evident by the fact thatthey sent interest rates as low as 0.001%. For those who have borrowed, the burden of the debt becomes heavierwith each passing day. Deflation is also dissuasion for consumers to spend because their money is growingmore valuable when stuffed under their mattresses because real rates are higher than the nominal rates.Upon taking a first glance at the Japanese economy in 2003, it appeared as if there was going to be an ongoingcycle of grotesque hardships that plagued the worlds second largest economy last year. During the first quarter,the unemployment rate was 5.4%, the Nikkei Exchange suffered declines, war on Iraq dampened confidenceand the SARS outbreaks furthered pessimism toward the prospect of a growing Japanese economy.Nonetheless, global economic growth, especially in the United States, helped to boost corporate profits andincrease consumer confidence. Global economic growth this year is projected to be 3.2% and this upward trend 2
  3. 3. in growth is expected to continue next year, reaching a forecasted 4.1% in 2004. Japan is currently on acontinued recovery path despite still sluggish consumer spending. Evidence of this economic outlook is seen inrecent data that shows the Japanese economy expanding for the sixth straight quarter at an annualized rate of2.3%. Also, the rise in July output reflects a recover in exports and an uptick in capital spending. The number ofemployed, including self-employed, rose for the third straight month, by 70,000 to 63.81 million employed inJapan. In fact, the unemployment rate was 5.3% in July, which was down for the second straight month. Theonly real negative economic indicator was Japans core nationwide Consumer Price Index (CPI), which fell0.2% in July from a year earlier, its 46th straight month of decline. The boost in job growth will hopefully resultto increased consumption and thus larger output for Japan in 2004.The major issue still lurking over their economy resides in the continued deflation, which cannot be properlydealt with unless much-needed structural reform of the banking system occurs. Fortunately, the Bank of Japanhas recently taken measures, though desperate as such, to take steps in restructuring the banking system indeclaring the purchase of three trillion yen of shares (or $24.5 billion in U.S. dollars) held by at least ten majorfinancial institutions for a minimum holding period of ten years. EUROPEAN UNIONFor the year 2002, the Euro area experienced significantly weaker economic growth than anticipated. Consumerconfidence continued to be negatively affected by geopolitical tensions, in particular the conflicts inAfghanistan and Iraq, depressed equity prices and higher oil prices. A lackluster domestic demand was alsoattributed to poor profitability by firms as well as concerns about unemployment, hurting their ability to shakeoff the debilitating effects of the global economic slowdown in 2001. Between 1996 and 2002, living standardsin the Euro area were lower than those of the United States, and the gap will likely persists for at lest the nextfive years due to their weaker economic recovery.In 2003, overall growth has been relatively moderate so far, although there have been divergent intra-regionaltrends. Germany, Portugal, Italy and the Netherlands are lagging with 1/2%-1% growth this year, while France,Finland, Austria and Spain are showing a stronger growth level of 1.4%-2%. Given the high unemployment ratethat is creeping toward 9% this year and euro strength over the dollar, inflation is actually moderate at roughly 11/2 %, causing consumption to strengthen and consumer confidence to be somewhat restored. At the same time,the existing exchange rates between the euro and U.S. dollar are a major cause for concern. Drops in the pricelevels are causing European firms to lose market share as U.S. good become cheaper, making it very difficultfor these European firms to compete. These profit pressures are causing the European companies to cut pricesand have especially hurt major German and French firms such as DaimlerChrysler, Volkswagen, Alcatel andMichelin. An upcoming issue has surfaced in the euro area as Germany, which accounts for approximately 28%of European GDP, faces risks of deflation and stagnation.Demand has been considerably weak in the European Union and monetary policy is proving ineffective. Weakexports are partially blamed for this development. Also, the unemployment rate, which registered 9.2% inMarch 2003, represents over 4 million lost jobs. Growth is expected to remain below trend in all economies in2004 with stronger growth in the U.S. than Europe. Fortunately, major American companies, such as Intel andJohnson & Johnson produce up to 30% of their business from Japan and the European Union. This could beintegral toward efforts in stimulating their economy. Economists believe that in order to maintain strongergrowth throughout the European Union in 2004, they should rely on the higher real incomes due to lowerinflation, and aggressive structural reform would be needed in the labor. 3
  4. 4. RECAP OF FORECAST OF MACROECONOMIC CONDITIONS FOR NEAR TERM IN U.S., JAPAN AND EUROPEAN UNIONIn the U.S., low interest rates, rising consumer retail spending, household consumption and rising industrialproduction in both the auto and high-tech sectors are driving the economy forward. Real GDP growth reachedtwo and one-third percent growth in the first half of this year, driven by personal consumption, defensespending and residential and non-residential fixed investment. The one major economic concern is over theslow reconstruction efforts in Iraq, which is decreasing consumer confidence and delaying faltering U.S.economic recovery. This could possibly result in holding back recovery in the rest of the world.Japan is seeing improved corporate profits and increased business fixed investments. Yet, persistent weaknessand a continued dependency on the U.S. economic growth have allowed only marginal increases in globaloutput. Due to the fact that acceleration in the growth rate of overseas economies is needed to jump-start aneconomic recovery in Japan, who is not in a position to generate a self-sustained recovery, domestic demand isunlikely to gain momentum. According to the International Monetary Fund, unemployment in 2003 could reacha historical high of 5.6 percent. The only foreseeable means of reversing the depressing demand over the long-term is two-fold: better job training in order to increase output per capita, and a significant reform to increaseflexibility in the labor market.In the European Union, personal computers replacements led to increased investments and a strengthening ofconsumption throughout this year. Rea GDP grew by one-tenth of a percent in the first quarter of 2003,supported by an increase in private consumption. Doubts of the sustainability of increased economic activity inthe eurozone have led to projections of seven-tenths of a percent increase in real GDP, down from the twopercent originally predicted. The U.S. between 1996 and 2002 has outpaced living standards in the EuropeanUnion by four-tenths of a point a year, and the gap is expected to persist for the next five years. Despitestructural unemployment expected to decline quite little over the near future, there is a possibility of a mildrecovery in 2004, depending on the speed of the recovery of the U.S. economy and improvements in globalbusiness investments. 4
  5. 5. BIBLIOGRAPHYArestis, Phillip and Sawyer, Malcolm. "Europes imposed stability, now it has to create growth." August 25,2003.Beams, Nick. "World economy like a house of cards." 27 September 2002.Cotis, Jean-Philippe. "Toward Sustainable Economic Growth in Japan: The New Mix of Monetary and FiscalPolicy." Policy Research Institute. June 26, 2003.Elliot, Larry. "OECD calls for reforms in eurozone." 1 August 2003.Grimond, John. "What Ails Japan? A Survey of Japan." 20 April 2002."Iraq, budget deficit will be drag on U.S. economy." 10 September 2003.Lopez, Joe. "Bank of Japan announces desperate measures to shore up banking system." 26 September 2002.OECD Economic Outlook No. 73. June 2003."Postwar Iraq likely to cost more than war." 12 August 2003."Summary: Economist Roundtable Reviews Past, Looks to the Future." 2003. 5