Investors are increasingly skittish about putting all their eggs in one basket. Many learned the hard way from Enron, Tyco and other scandals. It is fashionable at the moment for investors to be risk averse and to diversify their equities portfolios by industry and by geographic area as well. This diversification is playing a role in the dollar’s weakening and sinking U.S. stock indexes as foreign investors keep their money closer to home. But it seems that before spreading one’s portfolio willy-nilly geographically, it is a good idea to know a little about what is happening overseas and whether the elements of growth are there to support risk averse portfolios. The investor might not be spreading risk but increasing it.

To illustrate the wide range of worldwide growth rates, the two graphs below show recent year over year growth rates for the major industrialized economies. In the first graph are the United States, Britain, the European Monetary Union and Japan. The second graph includes the EMU’s three largest economies — Germany, France and Italy — plus Australia and Canada.

Asia

Australia — The Australian economy has proven to be very resilient despite the worldwide growth slowdown. Strong domestic demand, especially for housing helped. Australia's economy expanded in the first quarter, spurred on by consumer spending, a construction boom and a recovery in exports. The lowest mortgage rates in three decades plus an A$10,000 government handout to first home builders boosted residential construction 27.8 percent in the first quarter from a year ago. That spending spilled over to more purchases of household furnishings and electrical appliances. Because of the vigorous growth, the Reserve Bank of Australia has already raised key interest rates in the face of rising prices.

Japan — On a quarterly basis, Japanese first quarter GDP bounced into positive territory after three negative quarters. Growing exports are largely responsible for the bounce, which helped reduce the inventory overhang and even raised industrial production to meet demand, especially for autos. Japan is the only major industrial country to experience negative year over year growth for the past four quarters. Japan's latest downturn — by most reckonings its third in the past decade — has been particularly nasty. However, there is disagreement over how long the latest rebound can last, given that it is driven by exports that account for just 10 percent of GDP.

Europe

EMU — For the combined 12 countries that make up the European Monetary Union, GDP barely escaped a decline in the first quarter and crept up a mere 0.1 percent when compared with last year. While all of the big three — Germany, France and Italy — suffered third quarter declines in the aftermath of September 11, France bounced back quickly on the strength of domestic demand. However for the EMU as a whole, this was outweighed by two quarters of falling GDP in Germany, the EMU’s largest country. Italy too, weighed on overall growth.

Many of Germany’s economic ills can be traced back to German reunification in 1989-90. However, appropriate economic policies to deal with the unification’s aftermath were not developed. Instead of reforming the rigidities in west Germany’s bureaucratic capitalism, they were exported to the east. More than four million Germans are unemployed, public finances are under intense pressure, and the promised growth springboard has failed to bounce. The result has been an economic imbalance that has snuffed out any chance of a self-sustaining upswing in the east and is making the unification of the two unequal parts far more expensive than even the pessimists feared. Germany’s economic woes have had global repercussions. They have placed a huge strain on the United States as the world’s sole economic locomotive. And because Germany is the main trading partner for most European countries, the EMU as a whole is on a low growth trajectory. Although Germany returned to growth in the first quarter, thanks largely to exports and the weak euro, the country lost ground when compared with a year ago. And labor strife is impeding any acceleration of growth.

However, France — partly because it feared German power — has been far more successful than Germany in introducing structural reforms such as the 35 hour week and has promoted growth, competitiveness and employment. The strength of the consumer in France is good news for the European Central Bank. The bank's president, Wim Duisenberg, said that consumers will play a large role in determining the strength of the economic rebound this year.

Optimism among Italian businesses rose to the highest level since the beginning of last year. But this has not helped to get the Italian economy on track. GDP growth has petered out since the first quarter of 2001 to barely eke out 0.1 percent growth in the first quarter when compared with last year. Inventories rebounded and accounted for virtually all of the increase, offsetting declines in domestic demand, capital investment and exports.

Britain — Growth here has been fostered by a strong service sector while the manufacturing sector has been in recession, thanks to their strong currency versus the euro. However, first quarter GDP remained unchanged when compared with the previous quarter while the economy grew by one percent when compared with last year. Manufacturing is finally showing signs of revival. But in Britain as in the United States and Australia, the hero has been the consumer, who continued to buy through thick and thin. And an exuberant housing sector has done its part to stimulate ancillary purchases.

Americas

Canada — The Canadian economy has held up well during the past year. Often, the Canadian economy is considered the stepchild of the U.S. economy. But that hasn’t been so since the third quarter of 2000. In each quarter since then, the Canadian economy has outgrown the United States when compared with the previous year. After skirting recession during the global slump last year, Canada is bounding ahead at a surprising pace. The Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) forecast that Canada will lead the Group of Seven industrialized nations (United States, Canada, Britain, Germany, Italy, France and Japan) in economic growth this year and next. In recent months, Canada has posted stronger than expected employment, housing, retail sales and manufacturing data. Citing the "robust" recovery, the Bank of Canada was the first G-7 central bank to raise its benchmark interest rate. Even the chronically weak Canadian dollar finally has gotten a lift. Tax cuts and low interest rates kept consumers spending last year while the weak Canadian dollar boosted exports.

United States — After a negative third quarter (but not compared with the prior year), the United States economy returned to growth in the fourth quarter 2001 and accelerated the pace of the recovery in the first quarter of 2002. Exporting countries such as Japan and Germany are especially dependent on a U.S. recovery to revive their economies given the absence of domestic demand. And U.S. consumers have done their part by maintaining demand for imports such as automobiles. The strong dollar, especially against the euro and yen, has enabled exporters to sell their wares here relatively cheaply. Although growth promises to be slower in the second quarter, the seeds are building towards a recovery that will permeate the economy. Market players wait for capital spending to pick up here and overseas as well.

Bottom Line

Although prospects for a weaker second quarter growth rate in the United States worry investors, there is no doubt that the roots of recovery in the United States are deepening. In Britain, after many months of recession, manufacturing is finally beginning to show signs of life, which should make growth more balanced. In Europe too, despite its structural problems, the EMU is stabilizing. Although officials say that a strengthening euro is a good thing — it helps reduce its inflation problem — they worry that it will cut into exports by making their goods more expensive and less competitive overseas. For Japan, the jury is still out. Doubts abound about whether, in the absence of domestic demand and the presence of deflation, the economy can continue to grow. It is a tricky time indeed for investors to evaluate trends overseas and invest with confidence. Overall U.S. economic performance still leads the pack.