GLOBAL FINANCE

In 1997, the US economy looked particularly good, with 4% GDP

growth (against an average of 2.4% annually over the previous two
decades), inflation under 2%, and unemployment at a 25-year low of
4.6%. Between 1995 and mid-1998, American households increased
their net worth from stock market gains of some $6trn. Since then,
the collapse of the dot-com stocks, a down-turn in the overall stock
market and a looming recession has called much of the New Economy
optimism into doubt. The rules of the ``Old Economy'' may not have
been repealed after all.

There can be little doubt that high-tech advances have brought

about productivity gains on a microeconomic level (see below), but
the New Economy rhetoric is making macro, not micro, claims. What
is remarkable about it is how rapidly the idea of a New Economy
has been taken up in business. Serious businesspeople have been
taking the New Economy seriously; why? On a micro level, it is not
hard to understand your business may or may not be able to gain
advantages by entering e-commerce, say, and at the very least you
need to understand what all the fuss is about. Most business is done
at the microeconomic level, so why should the New Economy's macro
claims matter? The answer could be simply that it is good for business
confidence. The hope of increased growth is an attractive one; we all
like to feel that everything is getting better in a general way, and if our
customers, suppliers and investors think so too, so much the better.

In Chapter 4 of Finance Express (also in the ExpressExec series), the

potential microeconomic effects of the New Economy are discussed
in detail. Here we are examining the New Economy's two principal
macroeconomic claims:

» that in the late 1990s the US economy, despite the low official figures,

was actually experiencing high productivity growth;

» that expanding demand will not lead to inflation, even if unemploy-

ment is very low. Global competition will prevent US firms from
raising their prices.

The first claim, of high productivity growth, looks a little shakier in late
2001 than it did during the late 1990s. The OECD latest provisional GDP
forecasts predict US growth of 1.1% for 2001 and 1.3% for 2002, with