Even the healthiest economy is not immune to a dose of tiger flu

The general health of the world economy is more fragile than at any stage since the early Eighties
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The Independent Culture
QUITE SUDDENLY America has become seriously worried about the world economy. Is there something nasty happening that will end the long American boom?

Americans - even those in top jobs - don't normally spend too much time thinking about the rest of the world. At the moment the US economy is racing on in such an impressive way that they don't seem to need to - eight years of straight growth, with estimates for this year being increased all the time. But having spent most of the last week in the States talking with senior business people, I have noted a sharp change in view.

A couple of months ago the talk was all about the Fed, domestic demand, interest rates and Wall Street. The Asian slump was a long way away. Now it is much more about the plight of Japan, whether China would devalue, what pressures there would be on US high-tech industries and, in particular, whether instability in the rest of the world might be the thing that ends the long American boom.

One event a week ago illustrates the way this concern is affecting US economic policy. The US Federal Reserve stepped into the foreign exchanges to prop up the Japanese yen. At the time many people assumed that there was some sort of quid pro quo from the Japanese - that they would bring in some policy measures to boost the economy. Now it looks as though there was not.

So why did the US help? The plausible answer, which cannot be checked for obvious reasons, was that the Chinese told them to. If they did not help, China would have been forced to devalue its own currency. It was very much in the economic self-interest of America to stop this happening, for the balance of trade with China, already the second largest deficit after that with Japan, would widen even further.

It was also in their political self-interest: today President Clinton starts his visit to China and the health of the relationship between the two countries (not to mention President Clinton's position against the protectionists in the US) would be greatly undermined were the trade deficit to soar still further.

But the worry in the US is not just about the economic collapse in the developing countries of East Asia or the recession (it is not yet a collapse) in Japan. It is the general health of the world economy that is now more fragile than at any stage since the early Eighties.

You do not see that in the US itself. The feeling of robust health is palpable, at least in the metropolitan centres: the planes are crammed, the shops busy, the restaurants packed. As each month passes the economists up their estimates for growth. A year ago the consensus was that the US economy would grow by about 2.25 per cent this year; now they reckon it will be 3.25 per cent. There are signs of strain, most notably in their widening trade deficit, but most Americans think the economy can ride out those pressures.

No, the problem is not internal; it is external. The fact that Japan is in recession has raised the spectre: could it happen here? Look around the world and ask: where will global demand come from over the next couple of years?

It won't come from East Asia, that is for sure. At some stage the region will of course come through recession, and by the middle of the next decade it could well be growing as fast as ever. But that is a long time to wait.

Europe? Well, yes a bit. Up to now the countries that have been growing fast have been the small ones (with the exception of the UK) and those on the fringe, while the countries which have been growing slowly have been the large ones and those at the core. Until a month ago that seemed to be changing, for core continental Europe was at last starting to show decent growth.

This year looks like being the first since 1992 when France and Germany will grow faster than the UK. But this growth has been mainly driven by exports, and it is not universal: in the last week figures have come out showing that Italy may be back in recession, and that output in the euro area as a whole is slowing too. The UK itself cannot help much as a source of demand. There is a limit to the extent to which we are able to widen our current account deficit, even if the rest of the world would let us do so.

Where else? Parts of Eastern Europe are doing fine but in Russia things are profoundly worrying. Parts of Latin America are doing all right too, but the largest economy, Brazil, is flat. India? No, for there has been a massive loss of financial confidence since the resumption of nuclear tests. Canada and Australia? Canada is growing well but the Canadian dollar is so cheap against the US one that it would be astounding if it were not. Australia has been seriously damaged by the fall in demand from the rest of its time zone.

Where else? Well, there really isn't anywhere else; or rather there isn't anywhere else that is big enough to make a material difference to global growth. Result: estimates for global growth have been coming down, even though estimates for the largest economy, the US, have been going up. The burden on the US to keep the whole show going becomes greater and greater, and as a result, the more thoughtful people in the business community are starting to get twitchy.

There is even an uncomfortable, if partial, parallel with East Asia. The US is now the fastest-growing region, as East Asia was 18 months ago. Rapid growth attracts an inflow of foreign capital, which in turn helps sustain the growth. That too is happening now in the US (hence the strong dollar), just as it happened in East Asia until the middle of last year. But suppose, just suppose, that the inflow ceases, and maybe even becomes an outflow; then the virtuous circle is reversed into a vicious spiral - as has happened in East Asia.

Mercifully the US does not have the crony capitalism of East Asia; it does not have the close relationships between banks and commercial companies; it does not have the corruption, either. But it is the world's largest debtor nation, and some distant day the foreigners might want to cash their chips.

Then of course there is Wall Street. People have been calling the turn in US equities for many months and have been proved wrong. But nothing goes up for ever and however you slice them, US share prices are historically at a high level. There is an obvious potential vulnerability here.

Economic moods are as much about perception as reality. I don't think the realities of the world economy have changed much in the last three months. But I know that the perception, particularly in the US, has changed. People are starting to talk about preparing for the ending of the boom. The idea that there might be a post-millennial slump is appearing in newspaper columns, sometimes with the spin that if there is, it won't be America's fault: it will be the fault of Europe and East Asia.

We used to say that if America sneezed, Europe caught a cold. Now East Asia has pneumonia and Europe is a bit snuffly. Expect a sneeze in America - maybe more.