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msnbc.com

This holiday week has seen a fresh wave of reports suggesting the U.S. economy is continuing to gain momentum and will keep expanding at a healthy pace well into next year. It gets better: The accelerating U.S. economy is lifting activity in Japan and western Europe, too, even in countries where growth had come to a near-standstill.

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A semiannual forecast issued Wednesday by a group representing 30 of the world’s biggest economies declared that “a palpable recovery has finally taken hold” around the world. The report from the Organization for Economic Cooperation and Development referred to a “revival of animal spirits” in the United States, the world’s largest economy, and surprisingly strong improvement in No. 2 Japan.

“Looking further ahead, the most likely scenario for the next two years is one of sustained growth in the United States and progressive recovery in Europe and Japan,” OECD chief economist Jean-Philippe Cotis said in the report.

In a telephone interview from his office in Paris, Cotis said the most recent data from Europe have been “relatively reassuring,” although the situation is “less straightforward” than in the United States with its stunning 8.2 percent third-quarter growth, the fastest pace in 19 years.

“Business confidence is improving and there are concrete expectations that there will be a revival of activity,” Cotis said of Europe. “It is more than a false start.”

In referring to “animal spirits,” Cotis invoked a Keynesian catchphrase used to describe a mysterious mood of growing confidence that inspires entrepreneurs to take risks.

Given the relatively strong growth in central Europe as well as growth in the United States, Japan and China, stronger growth in western Europe next year is all but assured, Cotis said. That is a huge relief, because while the U.S. has endured a frustratingly sluggish recovery over the past two years, much of western Europe actually has gone into reverse. Germany the world’s third-biggest economy, either slipped back into recession this year or never emerged from it.

After near-zero growth for two straight years, the OECD is predicting Germany will expand by a modest 1.8 percent next year, and the economy is expected to get a boost from a tax-cut and regulatory reform package.

“German growth is key,” said Cotis. He said there is “every sign” of recovery in continental Europe, led by Italy and France, which typically turn up ahead of giant Germany.

An uptick in Japan
In Japan, which has experienced three recessions over the past decade, the news has been even better, with 2003 growth projected at 2.7 percent, the best year since 2000. Growth is likely to slow to 1.8 percent next year, according to the OECD, but that is still far better than the average of the past decade. For both Germany and Japan, faced with slow population growth and tough regional competition, slow growth is probably all that can be expected for the foreseeable future, analysts said.

“I think (Japan) is going to be constrained by the continued weakness in the banking system,” said Jay Bryson, global economist for Wachovia Securities. “Until they get that fixed we’re not going to be looking at the Japan of the 1980s. But even a Japan hitting on three or four cylinders is good news.”

While the U.S. economy has been led out of the economic wilderness by strong consumer spending followed eventually by growth in business investment, consumer activity has been notably absent in western Europe and Japan.

“What is interesting in the European context is that the consumer is still lagging,” said David Rosenberg, chief North American economist for Merrill Lynch. “Growth there depends on exports and capital spending. The same goes for Japan — it’s exports and capital spending.”

Consumer confidence turns up
In Europe at least, consumer confidence is rising, propelled in part by the encouraging news from the United States. And while the U.S. economy has only begun to show the first significant job creation in three years, economists are growing increasingly confident the upturn will be significant and lasting.

Even with one quarter of 8 percent-plus growth, for all of 2003 the U.S. economy is expected to turn in growth of just under 3 percent, rising to 4.2 percent next year, according to the OECD. Consumer confidence is at its highest level in more than a year, according to one widely followed poll, and new claims for unemployment benefits have fallen to their lowest level in more than two years on a rolling average basis that smoothes volatility.

The Federal Reserve’s latest Beige Book report on the economy in different parts of the country referred to improvements that seem “reasonably broadly based” with labor market conditions that are definitely improving.

Many forecasters have raised their projections for the next six to nine months, including Harris, who sees 4 percent growth through mid-2004, up from a previous forecast of 3.5 percent.

“Basically we don’t see why things are supposed to slow,” he said. “It looks like we’re now entering a real recovery phase that is more balanced. The business sector, which has been totally absent, is back. And the labor market is participating normally.”

While the U.S. economy is by far the biggest engine of global growth, it is not the only one. China and India in particular are contributing to a general Asian resurgence, said Rosenberg.

“It is just becoming an increasingly synchronized global expansion — there is very little doubt about that,” he said.

Certainly there are still significant risks, including geopolitical instability — a factor that was barely mentioned in the reams of data issued by the OECD Wednesday. But Cotis, the OECD economist, highlighted several risk factors including rising budget deficits in the United States and many Euroland countries.

“One big message is that this recovery will be a challenging recovery,” he said. “We are out of the recession, but in poor shape in a lot of areas, and we don’t have that much time to improve the record.”

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