Reports in U.S. and Europe dent confidence in economy
PARIS: Fears of a global slowdown in economic growth mounted Wednesday after fresh reports added to signs that turmoil in credit markets was biting into the real economy on both sides of the Atlantic.
In the United States, where a downturn in the housing market had already taken a toll on consumer spending, the Commerce Department reported that orders for durable goods - everything from commercial aircraft to home appliances - had fallen by 4.9 percent in August, indicating that business investment might not be able to pick up the slack.
The mood was similarly subdued in Europe. One survey indicated that consumer confidence in Germany, the largest European economy, had fallen to a five-month low. Two others showed that French and Italian manufacturers were growing more pessimistic about their outlook, following a dramatic decline in German business confidence Tuesday.
The latest data deal another blow to European hopes that the Continent might withstand the slowdown in the United States. European politicians have sought to play down the risk of contagion, putting on a brave face as economists have gradually scaled back their growth forecasts for the region. Some still insist that the collapse in the U.S. subprime mortgage market will bypass them altogether.
President Nicolas Sarkozy of France, for one, has maintained his growth forecast of 2 percent to 2.5 percent for this year and next, even as banks and international institutions almost unanimously expect growth of less than 2 percent.
And Europe has become less dependent on American growth. Exports to the United States account for less than 3 percent of the euro zone economy, giving rise to a theory of a decoupling of Europes fortunes from those of the United States. But analysts say that this dissociation does not protect European companies and consumers from the recent rise in borrowing costs.
The chorus of warning voices is growing louder. On Sunday the German government conceded for the first time that troubles in the United States might have negative repercussions on the German economy.
“The close links between financial markets mean global economic changes are making themselves felt in our domestic economy more strongly and earlier than they used to,” the German economy minister, Michael Glos, told the Frankfurter Allgemeine Zeitung.
In countries like Spain and Ireland, where the housing market has been a major contributor to growth, the ripple effects of the credit market crisis could be the most immediate. But across the region, banks remain nervous about lending to each other and lending rates have shot up.
Adding to the worries is the recent rise in oil prices beyond $80 a barrel, and the continuing rise of the euro to fresh records against the dollar. High energy prices have increased company costs, while the strong euro has made European exports more expensive.
The key to how much damage the European economy may face is whether its American counterpart falls into a recession, analysts say. Fears of a recession eased after the Federal Reserve slashed interest rates by half a point this month, but markets remain jittery. After the Commerce Department released its durable goods report, economists at Morgan Stanley lowered their forecast for U.S. third-quarter growth to an annual rate of 2.2. percent from 2.4 percent.
The U.S. treasury secretary, Henry Paulson Jr., has said he expects U.S. growth to accelerate in the second half of 2007, the Indian finance minister, Palaniappan Chidambaram, told Bloomberg News after meeting with Paulson on Wednesday.
A sudden slowdown in Europe could erode the ability of the Continents biggest economies to curb budget deficits and implement much-needed economic reforms, analysts say. After Germany overhauled its labor market, hopes have been pinned on France, the second-largest economy in the euro zone.
Since the summer, Sarkozy has accelerated his timetable to push through an ambitious platform of reviving the economy, but slower growth could complicate his task by leaving him little margin to appease voters with measures that could cushion the impact of policy changes.
On Wednesday, he unveiled his first budget, pledging to increase economic growth with a \272 billion, or $384 billion, spending package - one week after his prime minister warned that the country was “bankrupt.” Sarkozy is banking on \9 billion worth of tax cuts to boost consumer spending.
Sarkozy has irked Brussels by postponing his predecessors promise to balance Frances budget from 2010 to 2012. The proposals made Wednesday anticipate only a modest decline of the deficit from an estimated 2.4 percent of gross domestic product this year to 2.3 percent in 2008.
But as economists point out, even that modest decline looks ambitious given that the financing of the bill relies on an optimistic growth forecast that was drawn up before the recent upheaval in financial markets.
