By GREG IP and PATRICK BARTA
August 16, 2004; Page A1
An economic slowdown is spreading around the world as record oil prices, falling stocks and weak technology spending ripple from South Korea and Japan to the U.S. and Germany, casting doubt on a global recovery taken for granted just a few months ago.
Global weaknesses are an added worry for the U.S. because a three-year spending spree by American consumers is winding down, and economists had been counting on higher exports to help keep the U.S. expansion on track in the coming year.
The U.S. Commerce Department reported Friday that the U.S. trade deficit widened to a record $55.82 billion in June from $46.88 billion in May. That was a result of a 4.3% plunge in exports and a 3.3% jump in imports, driven heavily by a higher bill for oil from overseas. Some economists said the trade data may mean second-quarter growth could be revised down to an annual rate of about 2.5% from the government's 3% initial estimate.
Also Friday, the Japanese government said growth plunged to an annual rate of 1.7% in the second quarter, mostly because of a slump in business investment, after topping 6% in each of the previous two quarters. That was a jarring development in what has been shaping up as Japan's most promising expansion in more than a decade. At the same time, stock prices around the world were weighed down by cautious comments from major technology companies such as Cisco Systems Inc. and Hewlett-Packard Co.
"The risks that the global economy will enter an extended soft patch are rising," economists at J.P. Morgan Chase & Co. wrote in a report to clients Friday. They estimate that world growth probably slowed sharply to a 2.7% annual rate in the second quarter after several quarters above 5%.
Asian economies are particularly exposed, because many are more oil-dependent than the U.S., while China, their fastest-growing market, is slowing as monetary authorities work to cool inflationary pressures. Oil jumped $1.08 a barrel to a record $46.58 at the close of trading Friday on the New York Mercantile Exchange. A refinery fire in Indiana, the potential threat from hurricane Charley to oil production in the Gulf of Mexico and jitters over yesterday's referendum in Venezuela on Hugo Chavez's presidency all added to fears of interrupted supply.
To be sure, the latest data could prove to be anomalies, and indeed, some more-recent figures, such as August unemployment-insurance claims in the U.S. and July business and consumer-confidence surveys in Japan, portray a more upbeat picture. Strong commodity prices suggest that there has been no dramatic falloff in global demand, even from China.
Furthermore, higher oil prices are a net positive for countries that export oil, such as Canada, Mexico and the U.K. "It's very easy to tell either side of the story," said Bruce Kasman, head of economic research at J.P. Morgan. And oil prices could retreat in coming weeks if fears of supply disruptions prove unfounded.
Nonetheless, some policy makers around the world are worried. "Growth in the rest of the world appears to be slowing," U.S. Treasury Secretary John Snow said in Boca Raton, Fla., Friday, where he addressed a business group. "The price of oil is causing an economic headwind."
Oil shocks present the world's central banks with a dilemma. By sapping consumer spending and profits (outside the energy sector), they hurt growth and ordinarily would predicate lower interest rates. But rising oil prices also lift inflation, at least temporarily, which normally would call for higher interest rates.
Last week, the U.S. Federal Reserve walked a fine line between these concerns. It blamed recent U.S. economic weakness on the rise in energy prices. Still, it went ahead and raised its overnight interest-rate target to 1.5% from 1.25%. That move reflected Fed officials' overriding concern that interest rates still are too low for an expanding economy and worries among some policy makers that rising energy prices could aggravate latent inflation pressures.
The latest data, however, may ease such concerns. On Friday, the U.S. Labor Department said producer prices rose just 0.1% in July from June. Excluding the volatile food and energy categories, "core" producer prices rose 0.1%, a moderation from June's 0.2% increase. At the same time, the University of Michigan saw signs that slowing job creation and high gasoline prices may be eroding consumer optimism. Its preliminary index of consumer sentiment eased to 94 in early August from the 96.7 level of July, mostly because of concerns about the future. Consumers' assessment of their current conditions actually grew more upbeat.
Asia, meanwhile, relies so heavily on manufacturing to drive its economies that it tends to gulp down more oil as a percentage of its economic output than other parts of the world. According to estimates from the International Energy Agency in Paris, if oil prices were to average $35 a barrel for the next several years, it would shave 0.8% off China's growth in the first year, and 1.8% off Thailand's. That compares with an average growth cut of just 0.4% across the world's developed economies. (Japan, whose economy is relatively energy-efficient, should be less affected by high oil prices than the rest of Asia).
Le Duc Hoa, a 32-year-old tour guide in Vietnam, said his day trips from Saigon to the Mekong River delta burn up about $600 in gasoline each month, compared with about $300 six months ago. The cost of fueling his personal motorbike has doubled, too, he said, forcing him to spend less money on a host of luxury items -- including beer. The rise in oil prices "affects everybody" in Vietnam, he said. "I don't think the economy will be as good this year."
In South Korea, Hyundai Motor Co. said its domestic sales are down 18% compared with last year, though global sales continue to rise. The company said it has created a task force to draw up contingency plans -- such as cutting costs and shifting more investment into energy-efficient hybrid cars -- if oil prices continue to climb.
Japan's second-quarter growth was far weaker than expected by economists, some of whom questioned the reliability of the data and pointed to positive signs as reasons not to write off Japan's recovery.
However, a reliance on exports for growth makes Japan vulnerable to any slowdown overseas, particularly in its main export markets of the U.S. and China. "There's one thing you have to watch, and that's exports," said Peter Morgan, chief economist at HSBC in Tokyo. "That's the key going forward. If global growth slows, then exports will slow, too."
Any global slowing of exports will help make clear why developments in China also are crucial. Authorities there have been trying to cool their overheated economy since the spring, and higher oil prices are making the task more urgent. Inflation hit a seven-year high of 5.3% in July. That increases the odds that Chinese policy makers will feel the need to raise interest rates to ward off more cost pressures, a move that would increase the likelihood of slower growth for the rest of the region, including Japan. Such a move also might make it harder for China to slow its economy in a measured fashion, "adding further difficulties for engineering a soft landing," said Dong Tao, an economist at Credit Suisse First Boston in Hong Kong.
The Thai government moved earlier this year to subsidize retail gas prices to help offset rising oil costs. At the time, forecasters predicted that oil prices would decline soon, limiting the cost of the subsidy. As prices instead have kept climbing, the bill has soared to about $500 million. That will shoot to about $2 billion if prices remain high through next year -- a sizable figure for a $150 billion economy, said Supavud Saicheua, an economist at Phatra Securities, an investment bank in Bangkok.
Europe faces less of an oil risk because it uses less of it per unit of output. Furthermore, because it hasn't enjoyed a vigorous recovery as has the U.S., higher energy prices there are less likely to aggravate inflation. On Friday, Eurostat, the statistical agency for the 12 countries that use the euro, said the region expanded at a 0.5% rate (not annualized) in the second quarter from the first, down slightly from the first quarter's rate.
Still, higher energy prices make it harder for Europe to shift from dependence on exports to consumer spending. Hermann Remsperger, chief economist of Germany's Bundesbank, said oil at current levels will force his bank to factor in slightly less growth and less employment as well as a slightly higher inflation rate, according to an interview published by the German newspaper Welt am Sonntag last week.
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