Economic & Business Focus: Global Growth Falters

Cost pressures on U.S. businesses will remain as globalization continues but growth slows.

Global GDP growth will slow from 4.6 percent in 2004 to 4.4 percent in 2005, with notable declines in the United States and Japan, according to the International Monetary Fund's massive annual forecast. But an assortment of conditions threaten to derail even this reduced growth projection. Prominent among them are the rising U.S. current account deficit and the added pressure it places on the falling dollar. These twin threats could unravel the corporate profit surge in the United States, undercut the recovery in Europe and plunge emerging markets into a downward spiral.

For the United States, the IMF projects 4.6 percent GDP growth for 2004 and 3.9 percent for 2005. But U.S. growth could fall to 3 percent in the second half of 2004 and could be lower still in 2005, according to Charles Dumas, director and head of the international service at London-based Lombard Street Research Ltd. He believes that three factors may choke domestic growth in the next year: the pressure on household incomes and business profits resulting from the Asian boom; the fading of the fiscal and monetary stimulus of the past year, upon which the recovery relied heavily; and the impact on consumer spending of U.S. households' overstretched debt load.

"The world economy now has China and the Asian Tigers as major players, as well as the U.S., Europe and Japan," Dumas says. Growth in Asia is the chief source of upward pressure on the prices of oil, gas and other raw materials -- which, in turn, is raising consumer prices and business costs.

"In addition, U.S. households may see a zero real income increase in 2004, constraining consumption," Dumas predicts. The U.S. expansion over the past year has depended to a great degree on tax-cut-stimulated consumer spending. "But no tax benefit will be felt in future quarters, and at the end of this year some temporary investment incentives will be withdrawn," he says. "The future impact of fiscal and monetary policy will be restrictive, in contrast to the past two to three years."

U.S. consumer spending has continued to grow only because the savings rate is very low -- less than 2 percent of income -- and borrowing to finance consumption is at an all-time high. "With real income growth slowing and higher interest rates, consumers may decide to borrow at a less hectic pace," Dumas says. "At that point, the net savings rate will rise and consumer spending will drop. This could reinforce caution and exacerbate the slowdown."

As domestic growth slows, continued globalization will become essential for U.S. businesses to reduce costs and relieve pressure on the bottom line. U.S. labor markets will remain soft, however, and political opposition to overseas sourcing and outsourcing will continue. "Rhetoric aside, lower-cost labor is good for expense management and lower-cost products for U.S. consumers," notes Craig H. Schurr, senior vice president of international banking, National City Corp., Cleveland. "We cannot have it both ways. Businesses will continue to outsource, and the pace will increase."