The US consumer deserves most of the credit for taking the pressure off the world economy over the last couple of years. US demand has bolstered imports from China, Japan, the European Union and Canada. Economic forecasting has been turned away from the pessimism driven last year by the Asian financial crisis and severe pressures in Russia and Brazil towards the qualified optimism seen in last month's World Economic Survey from the International Monetary Fund. US Commerce Department figures last week show how the role of world consumer of last resort has led to sharp increases in US trade deficits. For the moment economists there are not too worried that they are unsustainable.
The latest OECD forecast for the US predicts 3.6 per cent growth this year but suggests that these deficits, along with negative personal savings, could reduce it to 2 per cent in 2000. Mr Alan Greenspan, chairman of the Federal Reserve, warned last week that continuing trade deficits might drive foreign investors away from the dollar, bringing its value down. He worries too that the extraordinarily long boom on Wall Street could trigger inflation requiring higher interest rates. A sharp correction would expose the high rate of US borrowing based on over-valued assets.
These warnings from such an eminent figure must be taken seriously. Mr Greenspan's constructive management of US economic policy over the last year has been a crucial factor in heading off the negative effects on the world economy of the events in Asia, Russia and Brazil. It follows from his analysis that other world regions will have to move smartly to take up the slack.
China and Japan account for 70 per cent of the current US trade deficit. Washington's policy towards Beijing is in crisis following the NATO strike on its embassy in Belgrade and further revelations of how Chinese espionage has compromised the most sensitive US military secrets. The Republican majority in Congress is in no mood as a result to approve early Chinese entry to the World Trade Organisation, which would be the best means of improving relations and reopening up Chinese demand for US products. Recovery elsewhere in Asia will not compensate for this.
Efforts to stimulate the Japanese economy have so far produced little in the way of growth sufficient to boost demand for imports; the IMF predicts a 1.4 per cent drop in its growth this year. A prominent US economist, Paul Krugman, calls on the Japanese authorities to be far more adventurous in stimulating growth through higher spending and lower taxation, even if these cause inflation. His suggestion that the world economy could otherwise face deflation has not been much discussed recently because of the turnaround led by the US, but it should be taken seriously in the medium term.
A great deal will depend, therefore, on whether the European economy can expand enough in the next couple of years to take pressure off the US and serve as an alternative pole of world demand and growth. This is a more important matter than transatlantic trade disputes. The outgoing US Treasury Secretary, Mr Robert Rubin, refers with good reason to the need for economic burden-sharing between the US and the EU. This objective has been obscured by ill-informed talk about the weak euro and the strong dollar; both of their values simply reflect current economic fundamentals. It is time for EU leaders to think ahead more strategically about international as well as European economic policy.