Global recovery strong, different

The global economy is on a growth streak that is shaping up to be the broadest and strongest expansion in more than three decades.

Rising spending and investment by consumers and businesses worldwide are boosting national economies on every continent, pushing down unemployment rates in many countries, and lifting business earnings and confidence.

Of 60 nations tracked by investment firm Bridgewater Associates, not one is in recession – the first time that has been true since 1969.

Yet this is a different kind of boom from any other in the post-World War II era, analysts say. The soaring economies of China, India, Russia, Brazil and other emerging nations increasingly are setting the pace, overshadowing the slower growth of the United States, Europe and Japan, where the benefits of the expansion have eluded many workers.

“This is the first recovery where developing economies are playing a dominant role,” said James Paulsen, chief strategist at Wells Capital Management in Minneapolis, which manages money for big investors such as pension funds.

The trend is being driven by free trade, which has created millions of jobs in emerging nations, fueling stunning new wealth.

China’s meteoric rise has been well-documented, but the boom has spread far and wide to include much of the rest of Asia, as well as Latin America, Eastern Europe and Africa.

With commodity exports and tourism surging, the South African economy grew about 5 percent last year, adjusted for inflation. That was nearly four times the average growth rate of the major European countries.

In India, economic deregulation and a fast-growing technology services sector are powering consumer demand.

College teacher Rakhi Maral notes that stores in her city of New Delhi now stock expensive imported perfumes that in years past could only be found at duty-free shops.

“People are being paid better, hence the buying capacity is more,” she says.

For Russia, the global hunger for energy and other raw materials has created a financial windfall. The country has become the world’s largest exporter of natural gas and second-largest exporter of oil, as well as a major supplier of metals, timber and other resources.

Wealth from those exports isdriving growth in the country’s retail and consumer goods sectors, said Al Breach, chief economist at investment bank Brunswick UBS in Moscow.

“Culturally, you always had a middle class here, but it was extremely poor,” Breach said. “Now, increasingly, that class is getting money, especially the younger generation.”

The simplest yardstick of economic success is a country’s growth in real gross domestic product, or how fast its total output of goods and services is rising, after inflation. For the developing world that growth is expected to be 6.9 percent this year – more than double the 3 percent pace of the developed world, according to the International Monetary Fund.

By contrast, in 1999 emerging economies grew 3.8 percent, relatively close to the 3.2 percent rate of developed nations.

The breakaway growth of the developing world is why the global economy overall is on track to post its fourth straight year of 4 percent-plus expansion, the IMF estimates. The last such streak was in the early 1970s.

With the developed world’s growth lagging well behind that of emerging economies, however, workers in industrialized nations may not feel as if they are part of the global boom. Wages in the United States, for example, have been slow to rise in recent years. In Western Europe, unemployment rates remain high.

The United States and other countries in the developed world have lost jobs to emerging nations as a result of free trade, triggering protectionist sentiment here and in Europe.

Also, zooming prices for oil and other commodities, which have enriched the developing nations that export them, have come largely at the expense of the West.

“We can’t really see an improvement in living standards for a large segment of the population” in industrialized nations, said C. Fred Bergsten, director of the Institute for International Economics in Washington.

But while there is no question that some of the developing world’s gains are, in effect, a transfer of wealth from the industrialized world, experts say that emerging countries’ success also is flowing back to the United States, Europe and Japan – which combined still account for about two-thirds of the global economy.

The strength of the emerging economies could mean that this global expansion cycle will last longer than normal, as more people join the ranks of the consumer society. That could be good news for aging industrialized nations as well.

What’s more, low-cost goods from developing nations have helped keep inflation pressures muted despite the jump in oil prices, economists say.

“A lot of people are benefiting from globalization and they don’t know it,” said Paul Kasriel, economist at Northern Trust Co. in Chicago. “If you’re buying things at lower prices, and you still have your job, you’re benefiting.”

The potential for a mounting backlash against globalization, in both the developing and developed worlds, is one big risk to the boom. As U.S. consumers have continued to spend on imports, driving the U.S. trade deficit to unprecedented levels, some analysts have warned of a false prosperity. The deficit means the nation is going deeper into debt to sustain consumption.

“This trade deficit is financing a standard of living we really can’t afford,” said Byron Wien, strategist at Pequot Capital Management in New York.

Yet some analysts say the greater risk to the boom is that it will sow the seeds of its own demise by fostering rising inflation and interest rates.

Emerging nations have benefited from the low interest rates that prevailed in the developed world in recent years, as policymakers in the U.S., Europe and Japan sought to keep their economies out of recession. But growing inflation pressures, stemming in part from higher energy costs, are putting upward pressure on interest rates. And that is raising questions about how long the global economic boom can last.

Kasriel, the Northern Trust economist, believes the U.S. will fall into recession by year’s end if the Fed continues to tighten credit. “If the global economy is going to weaken, it’s going to be because of the U.S. consumer,” he said.