Recession unlikely for 1999

WASHINGTON -- The introduction of a common European currency, strength in the U.S. economy, and the beginning of an Asian rebound should keep any slowdown in 1999 from worsening into a global recession.

Europe may post the fastest growth of the world's regions next year, supported by declining borrowing costs and the new common currency, the euro, that will lessen exchange-rate fluctuations in Germany, France, and nine other nations.

The euro "could boost our sales by 5 to 10 percent," said Guenter Steffen, chief executive of TDS Informationstechnologie, which installs and operates SAP's R/3 business management software. Steffen said he isn't concerned about competition as he pushes to boost sales outside Germany. "The more competitors, the better," he said. "They'll create a bigger market. And in the end, TDS will benefit. So will most of Europe." Global growth in 1999 should at least match this year's 2.2 percent expansion, the slowest growth since 1991, according to a forecast this week from the International Monetary Fund. Other forecasters, who note the IMF has tended to underestimate the strength of economies around the world, are predicting an even faster pace of expansion. European economies should grow about 2.6 percent in 1999, down from an estimated 3 percent expansion this year, according to the European Commission. That will put Europe neck and neck with the United States, where analysts are still in search of the slowing growth they forecast from this year's pace of about 3.7 percent. In Asia, meanwhile, early signs suggest the worst may be over for recession-plagued emerging economies. That leaves the biggest question mark in Latin America, where recessions are expected in Brazil and other countries. Ahead of the euro's formal introduction on Friday, unemployment in the Euro-11 -- Germany, France, Italy, Belgium, the Netherlands, Luxembourg, Finland, Austria, Portugal, Spain and Ireland -- is at a five-year low, and consumer prices are rising just 1 percent a year, the slowest in half a century. That combination allowed the Bundesbank and other European central banks to cut interest rates, helped narrow budget deficits and reduce national debts, and fueled a record-setting run for stocks and bonds in the $6.5 trillion euro economy. Consumer and business confidence indexes are also rising. The European Central Bank, which will control interest-rate policy in the Euroland countries, may be pressured to reduce its benchmark rate below 3 percent in the first half of 1999 to offset falling commodity prices. That would tend to weaken the euro while helping the continent's exporters. Esec Holding, the world's No. 2 maker of computer-chip assembly machines, said on Nov. 26 it will close plants in Southeast Asia due to a "continued lackluster market." Esec's shares have fallen 75 percent this year. In the United States, unemployment of 4.4 percent is close to a 28-year low and incomes are rising. Housing starts for single families are at a 15-year high, and sales of new and existing homes will set records this year. Auto sales are on pace for the second best year on record, aided in part by three Federal Reserve cuts in the overnight bank loan rate. "People don't seem to be touched directly by the recent market turmoil," said Michael DiGiovanni, director of research for General Motors. "They care more that they have a good job, low inflation, low interest rates, and there are good deals out there." And while U.S. industrial production has fallen two out of the last three months, that's actually been a blessing because it helps rein in what could be inflationary growth. The U.S. economy will expand this year at close to 1997's 3.9 percent pace and consumer prices will rise only about 1.6 percent in 1998 -- the lowest since 1986. While the IMF projects a slowdown in U.S. growth to 1.8 percent next year, Diane Swonk, deputy chief economist at Bank One in Chicago, sees strong consumer spending contributing to 3.1 percent U.S. GDP growth in 1999. Offering support for that view, General Electric, the second-biggest U.S. company based on market value, said its per-share earnings should rise at least 14 percent next year. GE's forecast is built in part on a bet that Asia's downward spiral may be bottoming out. The Asian Development Bank, the IMF and many executives are predicting a rebound for most countries in the region next year after almost 18 months of contraction. South Korea, Taiwan, Singapore and Hong Kong should squeeze out 0.5 percent growth in 1999 after contracting 2.6 percent this year, according to the IMF. Together, Thailand, Indonesia, Malaysia, and the Philippines should see growth contract 1.4 percent, the IMF said. That's an improvement on their 10.6 percent decline this year. Investor optimism has helped send stock indexes in countries such as Singapore and Thailand up more than 50 percent in the last three months. Moody's Investors Service is reviewing South Korea's credit ratings for possible upgrade. "From June to August, it was a daily diet of customers pushing orders back," said Peter Kalmarczie, managing director of Singapore's Jade Technologies, which makes electronics parts. "That's not happening now." While there's no sign of a return to days when economies in Asia expanded 7 percent or more a year, the outlook at least isn't getting worse. At the same time, much of the region's fate still hinges on Japan, the world's second-largest economy, where government officials acknowledge any recovery is at least two years off. The IMF, citing concerns that recent government efforts to stimulate the economy and reform the banking system may be insufficient, projects the Japanese economy will contract 0.5 percent next year after shrinking 2.8 percent this year. Even as Asia stabilizes, Latin America is bracing for recessions in Brazil and other countries as the region posts its slowest growth rate in nine years under the strain of low commodity prices, faltering currencies, and a reduced flow of capital. Latin America as a whole will grow just 1.5 percent in 1999, down from 2.5 percent this year and 5.1 percent in 1997, the IMF said. From Chile's copper to Venezuela's oil to Argentina's grain, commodity prices have tumbled, lowering the region's exports after the collapse of Asian economies eroded global demand for those products. Investors, scarred by losses in Asia and Russia, have become hesitant to lend money in the region, sending interest rates soaring and choking off investment. "The bottom line is that interest rates are unreasonably high -- far above what you need to post strong growth rates," said Christian Stracke, a Latin American economist with Bankers Trust in New York. That's particularly true in Brazil, the region's biggest economy, where fear of a currency devaluation has sent benchmark interest rates soaring. The government pledged to cut its $64 billion budget deficit by more than 40 percent next year in exchange for an IMF-led credit line of $41.5 billion. High rates and spending cuts should cause the Brazilian economy to contract 1 percent next year, the IMF estimates, after it grew just 0.5 percent this year. Still, for the world as a whole, the prospects for next year look better than they did just a few months ago. "If the world economy has a `soft landing' in 1999, then a global recovery could begin by late in the year," said Bruce Steinberg, chief economist at Merrill Lynch in New York.

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