Fears that the recovery in the United States economy may be faltering led to a run on the dollar last week as poor results from the depressed hi-tech sector prompted investors to seek better returns abroad and in the safe havens of bonds and gold.
After a day in which the dollar fell against all major currencies, the US Treasury Secretary, Paul O’Neill, was forced to talk up the US economy. The dollar fell to its lowest level against the euro since January, and seemed poised to drop through the 90-cent level.
”The euro is close to breaking $0,90 and, when this level goes, we should see the euro climb steadily to $0,95 by June and $1 by the end of the year,” said David Brown, chief European economist at Bear Stearns.
O’Neill gave an upbeat assessment of the US economy, saying that growth should continue to improve this year and would be robust over the next several years. ”Based on my personal reading of the numbers and conversations with business people around the country, I believe that we are going to see continued improvement in the economy throughout 2002,” he said.
Despite figures that showed the US economy expanded at an annual rate of 5,8% in the first quarter, dealers focused on the Federal Reserve’s lukewarm comments about the health of the economy released last week and the dismal performance of a range of US blue-chip companies, which Wall Street believes may mean that the recovery will run out of steam over the coming months.
”Folks are starting to question how strong the recovery’s going to be after the first quarter … couple that with earnings which have been to me a little bit on the disappointing side,” said Rich Nash, chief market strategist at Victory Capital Management.
Eastman Kodak was the latest US corporate giant to report disappointing earnings. This followed news that AOL Time Warner had suffered a loss of $54,2-billion in the first quarter ? the largest corporate loss in history.
”The consensus continues to look for a return to ‘business as usual’ this year”, said Graham Turner of GFC Economics, a London-based consultancy. ”But the correction following the late-1990s capital spending binge is far from complete.”
Some respite was provided for the markets when the Saudi government denied media reports that it was considering joining Iraq’s suspension of oil exports in protest at the US failure to secure peace between Israel and the Palestinians. Suggestions that the Saudis ? the leading doves in the Opec oil cartel ? might take a more hawkish line had earlier caused prices to rise by almost a dollar a barrel in New York. They later slipped back after the Saudi embassy in Washington issued its statement.
Financial markets in the US have been under pressure for several weeks. All the main stock market indices have been gradually losing ground as investors digest disappointing earnings reports.
Economic data has suggested that consumer spending is coming off the boil in the face of weak stock markets and job losses. Figures published last week showed new jobless claims in the most recent week running at above the 400000 level ? which most economists believe recessionary.
Despite a generally upbeat forecast, the Organisation for Economic Cooperation and Development (OECD)warned that the US was still vulnerable to higher oil prices or a loss of investor confidence in the ability of the American corporate sector to generate healthy profits. ”Perhaps it is ironic that new doubts about the global recovery are emerging just as the International Monetary Fund and the OECD are revising growth expectations higher”, said Brown. ”In the US the Federal Reserve has been warning for some time that growth could relapse once inventory rebuilding has been completed.”
The OECD said that a robust US recovery is crucial if the West is to bounce back rapidly from its first synchronised downturn in more than 25 years.
In its half-yearly health check of the global economy, the Paris-based think-tank said both the European Union and Japan would have weaker growth in 2002 than they enjoyed last year, but that a pickup in the world’s largest economy would more than compensate for it.
The OECD predicted that growth for its 29 rich-country members would pick up from 1% last year to 1,8% in 2002, with US output more than doubling from 1,2% to 2,5%.
”The US is leading the upturn,” it said. ”Rapid and forceful monetary action, together with fiscal expansion, helped bring about renewed growth from late 2001. Growth is driven by consumption, private and public, and an end to the rundown in stocks, providing a near-term boost to demand and output. A gradual strengthening in business investment is expected to underpin the recovery in the second half of 2002 and into 2003.”
Japan’s recession is expected to worsen this year. German growth is forecast to recover only slightly, but the European Union as a whole will expand by just 1,5%, down from last year’s 1,7%. The OECD admitted that the recovery would initially be patchy, but said confidence was returning more rapidly than had been imagined after September 11.