Disappointingly Slow Growth

Dec. 21, 2004
U.S., Europe and Japan will be 2003 laggards.

Like a sports team rebuilding after several heady seasons, the world's major economies -- including the U.S. economy, the world's largest -- are likely to disappoint rather than inspire in 2003. Indeed, the economic sport of forecast lowering is already under way. Between early September and mid-November, as the U.S. recovery from the 2001 recession sputtered and anxiety increased over a possible war with Iraq, Merrill Lynch & Co., for example, dropped its U.S. inflation-adjusted GDP forecast for the first quarter of 2003 to 2.5% from 4.1% and lowered its estimate for full-year 2003 growth to 3% from 3.7%. More bearish than the New York-based Bull, however, is a sizable majority of the 150 corporate CEOs belonging to the Business Roundtable, an influential Washington, D.C.-based business-policy group. Some 64% anticipate less than 2% real growth for the U.S. economy in 2003, dramatically less than the economy's 3.2% average annual growth rate during the last decade. Meanwhile, more than two-thirds of financial officers in midsized companies responding to a recent American Express Co. survey say they expect the U.S. economy will stay flat, act erratically or decline further in 2003. In North America, Canada is likely to be the growth leader in 2003, with a 3.4% real advance in GDP, down just a bit from 2002's 3.5%, figures BNP Paribas SA. Depending upon what happens with the U.S. economy, Mexico could show as much as 3.2% growth in 2003, says the Paris-based financial firm. In South America, the amount of growth in Brazil's economy, the continent's largest, depends upon the political success of new president Lula da Silva. In contrast, BNP Paribas is forecasting 3% shrinkage in Argentina's economy, South America's second-largest, after a 12.5% contraction in 2002. Across the Atlantic, the Economist magazine's panel of forecasters, between September and October, lowered its 2003 GDP growth prediction to 1.7% from 2% for the 12 nations using the euro. And in the Pacific, Japan, which has the world's second-largest economy, is likely to eke out only 0.6% growth in 2003. "The bust banking system, the inability to use interest rates as a stimulus, a fiscal deficit approaching 10% of GDP, and deflation are weights dragging the [Japanese] economy down," explains Paul Mortimer-Lee, a BNP Paribas global economist based in London. China promises to be Asia's standout economy, with BNP Paribas predicting a return to 8% real GDP growth, following 7.5% in 2002 and 7.3% last year. But even 8% is below 1990s' rates of 10% for the People's Republic. Japan's poor economic situation appears to have been weighing more heavily with CEOs, COOs, CFOs and other senior executives in Asia and the Pacific than with their counterparts in North America and Europe. In this year's third quarter, 51% fewer executives in Asia and the Pacific expected global economic conditions to improve during the next year than had in the second quarter, show Taylor Nelson Sofres/Deloitte Consulting survey data. Some 15% fewer executives in Europe foresaw improvement -- while, remarkably, a guardedly optimistic 10% more executives in North America anticipated global economic improvement. However, the survey was conducted before the fall release of data depicting U.S. manufacturing contracting again and before a concerned Federal Reserve Board cut U.S. short-term interest rates to 1.25% on Nov. 6. "Capital investment is the key to know what [U.S.] growth is going to be next year, and at this point in a normal cycle we should be seeing stronger capital investment," notes Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, an Arlington, Va. business policy group. "But we certainly aren't," he stressed as recently as a month ago. No wonder. Some 57% of the Business Roundtable's corporate CEOs, for example, expect their U.S. capital expenditures in 2003 to be the same as they were in 2002 -- and 24% anticipate they'll be less. Only 19% of the CEOs anticipate higher capital spending next year. "If we get to a point where the international situation is more predictable and stable and if we manage to avoid further shocks to the system . . . the conditions would be in place for a little bit more vigorous capital investment," Duesterberg says. But, at least for the interim, he isn't quarreling with the prediction of the Business Roundtable majority for less than 2% real GDP growth for the U.S. in 2003.

U.S. In 2003: Reduced Expectations
First Forecast Revised Forecast
Real GDP(y/y change) 3.7% 3%
Industrial Production(y/y change) 5.6% 3.6%
S&P 500 Operating EPS $55 $53
Source: Merrill Lynch & Co. forecast

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