Although the second quarter is almost history, more detailed first quarter data are finally just available. With most financial market participants perpetually fretting over the pace and prospects of economic growth in the major industrial countries, virtually no detail - no matter how late it is available - goes unstudied. One thing is clear. Growth has become even more disparate amongst the industrial world with Europe visibly the under-achiever. The UK and Australian economies responded to higher Central Bank interest rates and slowed while the U.S. performed better than all the others and continued to be the world's engine of growth.

GDP growth disparity continues
First quarter growth disappointed most analysts - Germany and France barely grew on the quarter while Italy declined for the second quarter in a row. The disappointing first quarter data translated into lowered forecasts from the Organization for Economic Cooperation and Development in their spring outlook. The outlook is mixed for the Group of Seven and Australia in 2005 and into 2006 with lowered forecasts for the European Monetary Union and Japan but a nudge higher for the U.S. in 2005.

To illustrate the wide range of worldwide growth rates, the first two graphs below show recent year-over-year gross domestic product (GDP) growth rates for the major industrialized economies. In the first graph (above) are the United States, Britain, the European Monetary Union and Japan. The second graph (below) includes the EMU's three largest economies - Germany, France and Italy - plus Australia and Canada. The third graph shows the May 2005 OECD forecasts for the G-7 and Australia. Although the graph shows a point forecast, a more prudent approach would look at a range. The table below compares OECD forecasts in November 2004 with May 2005.

OECD revises forecast down
Overall global economic growth is expected to slow this year due to high oil prices and exchange rate shifts according to the OECD. Their semi annual economic outlook noted that growth prospects ranged from solid in Asia to weak in Europe. OECD lowered its 2005 forecasts for Europe and Japan and said that global imbalances are widening. In the fall of 2004, two issues dampened their forecasts - the sinking value of the dollar and the rising price of crude oil. Now OECD cites the worsening slowdown in Europe. It should be noted that the forecasts were released prior to the EU constitution votes in France and the Netherlands and the uncertainty their 'No" votes engendered for the euro.

The OECD increased its growth forecast for the U.S. to 3.6 percent from 3.3 percent because consumers are still fulfilling their role as the locomotive of the world economy. But the report also makes it clear that should they falter, there is no back-up to take their place.

While Japan has been recovering from the soft patch it hit in 2004, deflation (as measured by the annual rate of change for the consumer price index) continues unabated while industrial demand has weakened in the past several months. OECD cut its projections for Japanese GDP growth to 1.5 percent from 2.1 percent in November. It cut its growth estimates for the eurozone from 1.9 percent to 1.2 percent as Italy slips into recession and German business confidence continues to sink. Consumer demand in both Japan and Europe is anemic. This hinders not only their own economic growth but also leaves other exporting nations with nowhere to go should a slowing economy or a depreciating dollar cause American demand to dry up.

The table below shows the revisions to growth for the major OECD countries.

OECD voiced concerns about fiscal discipline with good reason - six out of the seven largest OECD economies ran cyclically adjusted budget deficits approaching or exceeding 3 percent of GDP last year (Canada is the notable exception). If export demand drops, these countries have very little wiggle room to use fiscal policy to stimulate domestic demand.

In Japan and the EMU monetary policy options are also sharply limited - the Bank of Japan's policy interest rate has been near zero for four years. And European Monetary Union members have ceded control of their money supply to the European Central Bank. The ECB is still establishing its credibility, focusing almost solely on its 2 percent inflation target despite virtually no growth in many of the euro-using countries. (Recently in Italy there have been cries to return to the lira to solve their economic problems. In the pre-euro days, Italy would simply depreciate the currency to get out of trouble.)

The OECD agrees with the European national governments and supports a looser ECB monetary policy. However, the OECD said that all the major countries must take action to alleviate the growing imbalances. But it focused on Europe where change is needed the most and economic performance is weakest. OECD urged governments to get their fiscal house in order and EMU members to unfetter their markets to make their economies more robust and more integrated with those of their monetary partners. That includes deregulating labor markets. This would help lower Europe's unemployment rate and stimulate growth. But while some governments have taken baby steps in this direction much more remains undone. Politicians have so far been unwilling to confront the fierce public resistance to any change in continental Europe's generous work rules. And without reforms Europe's economies remain vulnerable to external shocks from exchange rates and/or oil prices.

Bottom line
The world's financial pages continue to worry about growth. The overvalued dollar - and the massive interventions by Asian central banks to keep it that way - have created lopsided and uneven growth in the global economy. The result has been the ballooning current account deficit in the U.S., an overheating economy in China and a global economy dangerously dependent on American consumer demand. Obviously this cannot go on forever. But when - and how sharply - will it stop?

Anne D. Picker, International Economist, Econoday