BusinessWeek: January 10, 2000

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The Spread of Prosperity

Is this the year the global economy finally takes off? First the good news. After a decade of struggling with growth rates averaging less than 2%, Western Europe may finally be on the way to a solid expansion. And most of the crisis-hit countries of East Asia are anticipated to show strong growth in 2000. The fastest growth is expected in China, South Korea, and Taiwan, where the index of leading economic indicators rose in November to a 22-month high.

Certainly, the global equity markets are signaling optimism. The U.S. stock market may have turned in a stellar performance in 1999, but the gains in bourses in such countries as Mexico, France, Germany, Japan, and Hong Kong were even more impressive. What's more, there is no sign of a retreat from globalization and the benefits it brings. Despite the recent fiasco in Seattle, the growth of trade is proceeding unimpeded. As a result, most forecasters have substantially marked up their projections for 2000. Merrill Lynch & Co. expects 3.3% global growth, up from 1.9% in 1998 and 2.7% in 1999. Economists at Morgan Stanley Dean Witter see 4% global growth in 2000.

But it's not clear yet that the global economy is out of the woods. Disturbing signs of weakness remain in the Japanese economy, though the government has poured money into restarting growth. Sales at Japan's largest retail stores fell in November, while industrial output has declined in two out of the last three months. Moreover, the sharp rise in oil prices in recent months, to over $25 per barrel, may put a damper on global growth, especially if the price keeps climbing.

And central banks around the globe may still be reluctant to follow the Federal Reserve's example of encouraging growth. Inflation is low in Europe--it was barely over 1% in 1999--but the European Central Bank is still expected to increase rates next year on the heels of a half-point rise in November. And the Japan's central bank, still worried about inflation, is keeping too tight a lid on the money supply, which is rising only at a 3% to 4% rate. If these policies continue, there is the risk that the global economy may be weaker than necessary in 2000.

In sum, it's easy to find things to worry about for 2000. But our hunch is that the prosperity experienced in America these last five years will spread to many other countries as the 21st century dawns.
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