Saturday, July 05, 2003

The world economy promises to become even more imbalanced with word out of Europe that
The euro zone economy will find it difficult to expand even one percent this year, European Monetary Affairs Commissioner Pedro Solbes said on Saturday, effectively scrapping a forecast made three months ago. "One percent growth is unlikely," Solbes told reporters
Germany and Italy contracted in 2003:I, and it seems that Germany is set to contract in 2003:II as well. Factory orders from abroad tanked for the Germans, falling 4.8% in May. In that exports constitute 1/3 of German GDP, and Germany is the largest economy in Europe, this spells more bad news for the EU constituting a second growth pole in the world economy this year.

A little noticed upward trend in the dollar v. the euro spells even more disequilibrium. Since mid-June the dollar has been steadily rising, from .842 euros on June 16 to .872 euros today. The dollar low against the euro was on May 30, at .84 euros. As the dollar begins to rise again, Europeans may be able to export more to the US. However, Europeans will likely have no pricing leverage due to the US market's near-monopsony powers and thus European exports may not provide the big boost envisioned. What is sure is that the US current account deficit will continue to skyrocket, and 6% of GDP is entirely likely this year -- even 7% isn't out of the question, particularly if the US economy really does recover in the second half of 2003.


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