G-7 optimism fails to impress investors

By Batuk Gathani

BRUSSELS, JULY 10. Although Finance Ministers from the world's seven richest economies issued a statement of confidence in the prospects for global economy and predicted an upturn in economic growth next year, investors and the business community are sceptical.

In the euro-zone, the weak euro is not helping major economies to avoid the economic slide. On the other side of the Atlantic, a strong dollar has clouded prospects of a much heralded economic rebound. The U.S. business complains that despite six interest rate cuts in recent weeks by the Federal Reserve, the unexpected rise in the value of the dollar against the world's two other major trading currencies - the Japanese yen and the euro - American products have become expensive and uncompetitive. As a result, the U.S. trade deficit is widening with the country's sales in Germany and France down by 30 per cent.

At the same time, major economies in Europe and Asia are faltering and an investment banker was on Monday quoted as saying: ``Foreigners know that if the U.S. is in trouble, then their own countries will be in worse trouble, because the U.S. is the global engine for growth.'' Investment-wise, the message is that holding dollars is the safest option in the highly volatile markets. This is also hampering the efforts by U.S. fiscal authorities to rev up the economy. In Western Europe, the euro has depreciated by 30 per cent against the dollar but it has not boosted economic growth in the region. Major manufacturing companies are reporting weak sales, low profits forecasts and are in process of laying off workers.

Germany, the euro-zone's locomotive economy, looks specially vulnerable and current estimates are that the German economy will be lucky to muster growth of very modest 1.3 per cent. Hence, many suspect that Europe may be hovering on the brink of stagflation - a dangerous combination of rising inflation and slowing economic activity. The latest indicators are that the European inflation rate has reached 3.4 per cent from 2.9 per cent in April and this is well above 2 per cent recommended by the European Central Bank. A weak euro coupled with rising energy cost has almost neutralised the much needed stimulus which came from the recent tax cuts which have put an estimated $ 50 billions in euro-zone consumers pockets.

The Group of Seven Finance Ministers also had a discussion about co-ordinating growth strategy and as Mr. Laurent Fabius, the French Finance Minister put it, there was universal recognition that ``everyone must do his bit'' to strengthen economic growth. The emerging markets are facing uncertain times as their currencies witnessed the steepest one-day fall last Friday and this week may also be turbulent.

The G-7 Ministers on Saturday agreed to study ways to raise the rate of potential global economic growth by encouraging more structural reforms such as improving labour mobility. The strategy is also to make the World Bank - and other global

development banks - more focused and effective by better co- ordination of development strategies. The Finance Ministers and G-7 officials are also preparing a package of special initiatives which will be presented to heads of Government leaders at their summit meeting in Geneva, Italy, later this month.

Much attention is now focused on the launch of the euro currency notes and coins on January 1, 2002. Foreign trade accounts for just 18 per cent of the euro zone's economy and hence it is argued that European manufacturing and service companies may not be bruised by falling demand in other markets. But, much will depend on some 300 million euro-zone consumers who have been rewarded with generous tax cuts to boost domestic consumer spending. This has yet to materialise as there is lack of consumer confidence because of uncertain times on economic and employment fronts.

Hence, current perception of some Western economists is that the risk of global recession may be rising and prospects of the U.S. economy's ``soft landing'' may be rougher than expected.

All this has triggered a sort of eerie nervousness in financial markets. Prominent fund managers in Europe are opting for higher cash positions as many are nervous about volatile stock markets.

The current European cash levels are at their highest point since the market melt down in 1998 triggered by Asian cash crises.

The fund managers are seen sitting on cash piles as they look for long term strategic bargain stocks.

Some of European investment firm's equity funds have as much as one-fifth of their assets in cash.

Analysts feel that the economic and fiscal outlook in Asia may also be deteriorating. The International Monetary Fund was recently quoted as saying that its recent estimate of 6.6 per cent growth in Asia this year was probably too optimistic.

Five years ago, Germany faced economic standstill with first signs of the locomotive economic power faltering due to the then overvalued D.Mark and high German social security costs added fuel to the fire.

Leading investment banks were then quoted as saying that the German currency was overvalued by as much as 25 per cent against the dollar.

Five years later today, tables have turned, as the euro which replaces the German mark has depreciated by 30 per cent against the dollar.

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Section  : International
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