Americans may spend Europe into higher growth

WHERE would Europe be without the Americans - the American consumers, that is ? A year or so ago, the smug assumption in the European Union, and particularly the eurozone, was that looming problems in the US would not seriously impact on Europe.

Hence, despite a clear historic link between prosperity on both sides of the Atlantic, robust growth forecasts emanated from Brussels, Berlin and Paris. In retrospect, they look plain silly.

The 1995-2000 average of 2.5% for the zone was going to be improved on in 2001 and continued in 2002. In practice, growth last year was only 1.5% and could be down to 1% this year. Poor old Germany managed only 0.7% in 2001 and may do worse this year. Unless, that is, the American economy rebounds and sucks in more imports. This, in turn, depends crucially on US consumers. A helpful rise in investment in the US is unlikely because so much spare capacity lingers from the 1990s boom years.

But there appears now to be a major and abrupt improvement in the US business outlook. Manufacturing sentiment has rocketed, new orders are the highest for seven years. There has been a rebound in consumption, existing home sales rose to a record in January.

Last week Federal Reserve chairman Alan Greenspan told the Senate that a recovery was 'already under way' and should continue provided consumption held up. His cheerful thoughts seemed to be reinforced by simultaneous Labour Department figures showing soaring productivity. The intriguing sub-text to the Greenspan commentary was that he may well have achieved the apparently impossible - and abolished the trade cycle for the first time in history.

Up-to-date figures indicate that there was not a proper recession last year after all, just a twitch. So the decade-long boom was remedied by no more than a brief period of shallow growth. It all seems too good to be true - and probably is.

Looking back to the last recession in the early 2002. 1990s, in the ancient days when there was still a trade cycle, that too was followed by a false dawn and a relapse.

It would also be unwise to attach too much importance to the productivity figures, since they always rise when firms are shedding labour. In any case, there is more to productivity than output per head. Output per unit of capital also matters and that is clearly going through a bad patch as profits fall. As for the rise in industrial orders, that owes quite a lot to the heavy shedding of inventories which went on through much of 2001.

Will US consumers fill the gap and ensure a US recovery? Well, they might. Consumption has recovered strongly from last September. And the surge in so many economic indicators, plus the Greenspan message, would seem likely to assist spenders' morale. Firms with surplus capacity give the consumer tremendous bargaining clout.

However, rising unemployment could certainly make spenders hesitate. Of the various and fluctuating jobless measurements, the most reliable guide for employment is the 'Help Wanted' index. This is well below the early 1990s level. The US is not out of the woods yet.

Bureaucratic build up

THE International Monetary Fund, now telling Britain it should impose VAT on items like food, is testimony to man's resourcefulness. It was established in 1944 to help countries maintain fixed exchange rates.

As the world switched, wisely, to flexible rates, the IMF seemed largely pointless. So it has progressed over the years - with a massive staff expansion - into an economic forecasting, financial analysis and all-purpose advisory body. A fine tribute to the bureaucrat's talent for empire building.