The World Has to Take Over as America Slows

The king is dead, long live the king. Ben Bernanke finally exorcised the ghost of his predecessor, Alan Greenspan, by telling a congressional committee that the former Federal Reserve Board chairman is wrong in contending that expansions “die of old age”. But he also told Congress that he thinks current Fed policy is about right, and that he has no intention of risking an infla-tionary spurt by lowering interest rates, even if the American economy is slowing.

Which it is. Tales of woe from the housing market are too well known to need repeating: sales and prices are down, inventories are up, and construction continues to fall. Business investment is not picking up the slack. With the service sector booming, unemployment low, and consumers still willing to shore up the economy, that doesn’t add up to the recession that has Greenspan worried, but it does add up to a slowdown. “Growth . . . looks likely to drop close to 1% in the first half of this year,” according to John Makin, economist at the American Enterprise Institute.

Until now, America has been the locomotive pulling along a good part of the world economy. Question: will the world’s economies now return the favour, and prevent a growth slowdown from morphing into a recession? In answering that question, keep in mind the enormous distance between the American economy and the others. The American economy is almost three times as large as that of second place Japan, and twelve times the size of the tenth-largest, Canada. So it will take a lot of “little engines that could” to make up for a slowing, never mind a slumping, American economy.

Japan might make up some of the slack. Its economy grew at an annualised rate of 4.8% in the last quarter of 2006, following a weak third quarter and, with private consumption fairly strong, seems sufficiently on track for the Bank of Japan to have raised interest rates a bit. Take-hiko Nakao, minister of the finance section of Japan’s American embassy, paints a rosy picture: excess production capacity has been mopped up, employers are in a mood to hire, and “excess debt and loans are . . . now in the past”. Deregulatory and legal reforms of the so-called lost decade of the 1990s have laid the basis for continued growth, he told a meeting of the National Economists Club in Washington last month.

Germany’s economy, the world’s third-largest, also seems to be awakening from a long nap. Business confidence is close to its historic high, unemployment has fallen to 8.1% in the west (but remains at 16.5% in the east), and employers plan to hire more people.

Thanks to a bit of rather quietly executed labour-market reform negotiated with the trade unions, which fear further capital and job flight to the east, German labour costs are returning to competitive levels. Equally important, voters seem at last to realise that the country must reform its overgenerous welfare system to increase incentives to work and decrease incentives to stay on the dole. At least, that’s the impression I had on my recent trip to Germany.

Which brings us to Britain. Whether because of Gordon Brown’s superior economic management, or the foundations for prosperity put in place by Margaret Thatcher, or because world trends — skilled immigrants, cheap Chinese goods, a buoyant America — have worked in Britain’s favour, it has racked up a decade of solid growth. Rising interest rates and a tightening fiscal stance might cool that growth in the near-term, but only a bit.

The service sector continues to grow, London claims a larger and larger share of the lucrative financial-services market, and the CBI reports that sales of DIY and household goods this month are so strong that inventories are being depleted and restocking is under way.

France is probably the weakest of the world’s top economies, with growth running at a rate of less than 2%. Nicolas Sarkozy, one of the presidential candidates, is upset that the European Central Bank’s one-size-fits-all interest rate is being raised to cool inflation in Spain, and keep it under control in growing Germany and Ireland, just when the French economy needs the stimulus of an interest-rate cut.

The future is not bright, regardless of the outcome of the election. Ségolene Royal is an old-line socialist with a programme that would surely doom France to perpetual double-digit unemployment. Sarkozy several times repeated to me his plans for “a rupture” with the past. But he is a protectionist, wants to politicise the European Central Bank and is urging France’s international competitors to raise their taxes to French levels.

China will, of course, continue to grow and to suck in raw materials from producers all over the world. Its sales to the United States might slip a bit as the American economy slows, but not enough to remove it as a force for world growth.

So, too, with Spain, which has had 13 years of solid growth, and now finds itself with an unbalanced economy laden with debt and too dependent on the housing sector. Nevertheless, the International Monetary Fund expects the Spanish economy to grow at an annual rate of 3.5% this year and next.

In short, it is possible that several other countries will keep the world economy moving along as the American engine runs low on steam. But, as always, this assumes no shock to the system from the likes of Iran, which could send oil prices rocketing up by manufacturing a crisis, or from protectionists determined to close off their home markets, or from terrorists.

So the smaller locomotives should pull the world economy forward, unless derailed by one of those “events, dear boy, events” that so worried Harold Macmillan.