U.S. economic slowdown casts shadow over Europe

By Batuk Gathani

BRUSSELS, DEC. 13.For the European investors it is still a long and agonising wait. It remains to be seen if the Chairman of the U.S. Federal Reserve, Mr. Alan Greenspan's talk of the economy's ``soft landing'' lifts the markets. This is happening amid the realisation that the mighty dollar is suspected to be losing its strength against the euro. Euro-zone economists and bankers share the perception that the U.S. economy is slowing down and the debate in European financial capitals is whether the U.S. will suffer either a hard or soft lending. The slowdown in the U.S. economy that began in the middle of this year has taken the annual growth rate from five per cent last year to about 2.5 per cent.

This is almost equivalent to the current economic growth rate in the European Union countries. The U.S. economy is seen slowing with industrial orders slowly dropping - according to the U.S. Department of Commerce.

Either way, the spillover effect of the U.S. slowdown on the euro-zone economies could be both dramatic and cataclysmic. Hence, investors on both sides of the Atlantic are understandably nervous about volatile stock markets. Since the beginning of December, the dollar has dropped 4.8 per cent in value against the euro and analysts predict that in the next 12 months, the euro may trade at 95 cents or 7.8 per cent above its current value. All this is in the realm of speculation but such forecasts trigger a sort of psychological impact on markets and investors.

There is also much uncertainty about the oil prices although the majority view is that they may slide down. To compound the confusion, it also remains to be seen how the new U.S. administration would cope with economic crises after January 20. The health of Japan's economy is also causing concern and casting its long shadow on the European and U.S. markets amid the fear that the Japanese currency is widely predicted to weaken as Japan's economic fundamentals look depressing.

The latest survey of euro-zone confidence data reveals that euro- zone economies were past their peak performance in the middle of this year and that the current economic growth has moderated to less than three per cent annualised growth during the past two quarters this year. The European unemployment rate has dropped by about 1 per cent but still remains high at below 9 per cent. Prominent bankers have been quoted as saying that the economic growth in the 11 euro-zone countries is ``slowing down, but it is not set to slow dramatically.'' The European perception is that much will depend on the rate of U.S. economic slowdown and if it ``falls below two per cent, it would be a serious issue.''

It is argued that the so-called ``soft landing'' of the U.S. economy is an ideal scenario, but some European observers see U.S. risking a hard landing. The Europeans feel that the ensuing weakness of the dollar could trigger a major outflow of capital from the U.S.

Many Western economists now believe that a risk of global recession may be rising amid indications that the U.S. economy's ``soft landing'' may be rougher than expected. This has triggered a sort of eerie nervousness in financial markets. Prominent fund managers in Europe are opting for higher cash positions.

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Section  : International
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