Sluggish U.S. Economy Shouldn’t Concern G7

 Sluggish U.S. Economy Shouldn’t Concern G7
Brian Wingfield, 04.13.07, 6:00 AM ET

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WASHINGTON –

When finance ministers and central bankers from the world’s leading industrialized countries gather here Friday, they are expected to boast about the fact that the world has enjoyed six straight years of economic growth of 4% or better — the first time in a generation this has happened.

But shouldn’t the leaders of the Group of Seven nations be concerned about the slowdown of the U.S. economy? The International Monetary Fund has lowered its projection for U.S. economic growth in 2007 from 3.3% to 2.2%, and the Federal Reserve continues to be concerned about inflation.

If the IMF projections are right, the United States will fall from first to fourth in terms of projected growth among G7 countries.

Is this a problem for the world economy?

Not really.

"One year doesn’t make a big difference," says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former assistant Treasury secretary for international affairs.

"The U.S. has been growing very rapidly, more so than the other G7 countries," he adds. "The fact that it’s reached its capacity … is not a big deal."

The U.S. economy is expected to grow only slightly less in 2007 than the euro zone (2.3%). In fact, the IMF predicts that none of the G7 countries will top 3% growth this year — in spite of a robust global economy — and next year the U.S. is expected to regain its place near the top with 2.8% growth, just barely behind Canada.

Nonetheless, the U.S. Treasury Department acknowledges that visiting G7 finance ministers will be curious to learn more about the stagnation in the U.S. economy.

"The global economic environment continues to be very favorable, but our colleagues will be interested in the health of the United States economy, especially against the background of developments in the subprime mortgage sector," says Treasury Undersecretary Timothy Adams.

In order to allay these concerns, U.S. representatives at the weekend’s meetings will emphasize America’s 3.1% growth rate within the last year, decreasing unemployment and inflation that Adams says "appears contained."

But the fact that inflation is not contained for certain — coupled with the lower growth prospects — is what has some worried, and some pundits have even expressed fears that the U.S. is headed for a period of "stagflation," when inflation is high, growth is low and efforts to fix one problem exacerbate the other.

According to Colin Bradford, a senior fellow at the Brookings Institution here, the problem is not that severe.

"The U.S. economy may be slowing down some, but that has the added benefit of reducing the pressure on the Fed to raise interest rates some more," he says. Bradford also points out that the increasingly multipolar nature of the global economy should provide a cushion for other countries. Robust growth in countries such as China, Spain and Brazil eases the burden on the U.S. to be the primary growth engine, he says.

Moreover, some experts argue that there has been no significant shock to the economy that might push the U.S. into a stagflationary mode.

Oil prices are high, but they have crept up steadily instead of soaring overnight as they did during the oil embargo of 1973, when they triggered across-the-board inflation. Oil producers have also tried to keep prices within relatively reasonable levels, simply because demand will fall if prices get too high.

On the growth side of the equation, the IMF predicts U.S. output will pick up in 2008 and import levels will remain healthy. According to Truman of the Peterson Institute, when growth drops to 1.5%, that’s when it’s time to worry.

Other than the economic condition of the U.S., finance ministers at the G7 meeting will discuss capital markets, hedge funds and how to jumpstart the stalled Doha round of trade negotiations.

Much talk will also focus on making the IMF a more effective overseer of exchange rate regimes. In fact, the meeting coincides with the semiannual IMF/World Bank meeting, also in Washington this weekend.

G7 meetings have a reputation for being chummy affairs where little is accomplished. The finance minister from Germany — the country that is hosting the G8 summit for presidents and prime ministers in June — will not even be there; he’s still on vacation with his family. Nor will China’s.

Even though China is not an official member of the elite club, it regularly takes part in discussions at G7 meetings.

All of this underscores the scant attention the world is paying to the U.S. slowdown, despite worries of a recession and inflation.

Upon announcing the IMF’s growth projections earlier this week, Simon Johnson, the organization’s economic counselor and director of research, put it best: "Our bottom line view is that while the U.S. may indeed have sneezed, it appears to be a mild sneeze thus far, and not likely to spread."

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Sluggish U.S. Economy Shouldn’t Concern G7 – Forbes.com

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