Economy improving, Fed chief says

BERLIN -- Federal Reserve chief Alan Greenspan said today he sees indications of a "fairly marked turnaround" in the U.S. economy, with May data suggesting it has "stabilized."

"The acceleration has not yet begun," Greenspan told a conference of top central bankers in Berlin, but he went on to note that recovering stock markets and other indications "are suggestive of a fairly marked turnaround."

Recent productivity gains and the impact of a U.S. tax cut taking effect July 1 will likely boost consumer spending and feed into the job market, while years of deregulation and investment in information technology had given the U.S. economy great resilience and flexibility, Greenspan said. But he also injected some caution.

"We are stabilizing and there is some indication of return, but it's not at this stage by any means clear," he said, addressing the conference via audio link.

"At this particular stage, with flexibility still increasing, I expect the growth rate to quicken in the United States. Maybe not as rapidly as some of the forecasts for the third quarter imply, but . . . everything seems to be in place," Greenspan said.

And despite voicing reservations about using fiscal policy to steer the economy, he said that "fortuitously, this particular cut in taxes is happening at the right time."

Greenspan renewed his previous assessment that deflation is a remote threat.

"All in all, we're looking at a low-probability event," he said. "But if it happens, our concerns are such that it could be a significant event that would require insurance against."

Earlier, the head of the European Central Bank -- speaking two days before a decision on whether to cut interest rates -- said Europe's economic growth remained weak in the first half of the year and forecast that inflation will stay subdued in the next few months.

But ECB president Wim Duisenberg also suggested that the low cost of borrowing is already helping European companies recover and predicted improved growth for the second half of the year.

The ECB is widely expected to cut interest rates by as much as half a percentage point Thursday to spur growth in Europe, though Duisenberg gave no clear signal in his conference remarks.

The European central bank expects a "continuation of weak economic growth throughout the first half," Duisenberg said. "However, we expect some acceleration in economic activity in the second half of this year and thereafter."

The European Union's head office said last week that inflation fell to an annual rate of 1.9 percent in May in the 12 countries that use the shared euro currency. That's below the bank's 2 percent guideline for the first time since June 2002.

The inflation rate should hover near that level in the coming months and "fall more significantly in 2004," Duisenberg forecast.

The bank's main mission is fighting inflation, and it only cuts rates when it can say that prices are under control. While rate cuts can boost growth, they can also worsen inflation if carried out at the wrong time.

Duisenberg noted that the euro's recent sharp rise against the dollar has taken even more upward pressure off prices in Europe, since a stronger currency makes imported goods and raw materials cheaper.

The rising euro has also led to fears it will stall growth by making exporters' goods more expensive against foreign competitors, prompting calls from politicians and economists for a rate cut.

Yet Duisenberg described the appreciation as a "correction" and said "the competitive position of euro-area producers . . . is now back in line with long-term averages."

Greenspan refused to comment on the euro's rise.

The ECB leadership has kept the key refinancing rate at 2.5 percent since a quarter-point cut March 6 even as economists say the case for lower rates has become clearer and clearer.

The euro countries showed zero growth in the first quarter, and the International Monetary Fund has warned that Germany, the continent's biggest economy, is at risk of debilitating deflation -- a vicious circle of falling prices and growth.

Other bankers at the privately sponsored conference in a luxury hotel in Berlin were Bank of England head Sir Edward George, Bank of France governor Jean-Claude Trichet and Toshiro Muto, deputy governor of the Bank of Japan.

Meanwhile, leaders of industrialized nations sought to reassure financial markets that they are prepared to work together to revive growth.

"Our economies face many challenges. However, major downside risks have receded and the conditions for a recovery are in place," a closing statement from the Group of Eight summit in Evian, France, said. "We are confident in the growth potential of our economies."

Copyright C 2003 Deseret News Publishing Co.
Provided by ProQuest Information and Learning Company. All rights Reserved.