World economy more balanced as US slows, Europe grows

"Overall, we’re seeing much better prospects for the world economy than in the last two years," said Greg Mount, senior international economist at Bank One Corp. in Chicago.

This is likely to please US policymakers as they have fretted in recent years that the world economy was like a one-engined plane, powered by the US economy alone.

Treasury Secretary Lawrence Summers has bluntly told his peers in Europe and Japan that they must do more to stimulate growth and to stop this economic imbalance as it could lead to major problems. Among them has been a huge U.S. Current account deficit, worth about 4 percent of gross domestic product.

The biggest piece of news on Friday that this imbalance in world growth might be changing came with the U.S. May employment report, which saw the unemployment rate rise from a 30-year low and private-sector hiring stall.

Following other data showing a slowdown, this prompted financial markets and economists to conclude that the world’s biggest economy is slowing to a more sustainable rate of growth which may mean the Federal Reserve will no longer have to pursue its campaign of interest rate rises to stop inflation.

Meanwhile in Europe, there were signs that growth in the11-nation euro-zone region has stepped up a gear.

Sharp falls in Spanish and Irish unemployment numbers, a record French purchasing managers report and upbeat signals from German and Italian manufacturing confirmed regional growth and followed a dramatic fall in April of unemployment in France.

Analysts said the European data was exactly the evidence needed to revive the fortunes of the Euro currency, which has dismayed many in Europe by falling sharply against the dollar after its launch in 1999.

Much of this fall is due to differing expectations of growth in the two economic blocs, with euro-zone growth forecast at around 3.5 percent this year versus nearly 5.0 percent in the United States.

What pleased economists most about the European data was that it showed growth was being generated internally and that it did not rely exclusively on exports.

"French unemployment tells us euro-zone recovery is moving to a new footing. It is not just an external demand story. Europe is starting to generate crucial domestic demand," said Darren Williams, European economist at Donaldson, Lufkin & Jenrette.

French unemployment shrank to its lowest level in almost 10years in April, dipping under 10 percent for the first time since 1991 and delivering the sort of job creation which will reinforce demand and growth even if conditions elsewhere slow.

The data were followed on Friday by figures showing Spanish joblessness at a 20-year low in May of 9.16 per cent, and Irish unemployment at a record low 4.6 percent last month.

Purchasing managers’ indices for France and Germany giving figures of 64.8 and 59.1 respectively — with anything above 50 indicating expansion — and data from Italy showing an 18.9 percent year-on-year rise in industrial orders in March added to the sunny picture.

But one batch of data may not signify a trend.

"The problem with the monthly data is there is a lot of noise," Federal Reserve Bank of Richmond President Alfred Broaddus told the Washington Association of Money Managers late on Thursday.

And risks still abound in the giant US economy.

Broaddus was among Federal Reserve officials who warned this week that inflation in the United States may still be moving to a higher level, suggesting that he, for one, was not ready to let up from the policy of moving interest rates up to stop the economy from overheating.

Some analysts fear such a policy risks ending the record-breaking expansion with a recession. This would have drastic implications for world demand and would hit European exporters who have gained from the euro’s recent slide.

It would also hurt the fragile Japanese economy, where economic recovery is still at an early stage, and stop the rebound in the emerging market economies of Asia and Latin America from their crises of 1997-99.