The United States and Europe were the bright spots in the world's turbulent economy last year, but now Europe is losing momentum-heightening risks of a dip here.

"Europe's growth rate is decelerating rapidly, and that leaves the U.S. almost completely isolated as the last place globally with robust conditions," said Lacy H. Hunt, an economist and partner at Hoisington Investment Management Co. in Austin, Tex.

European jobless levels have been stubbornly high for years, and manufacturing is being hurt anew by weak export markets. Deflationary pressure is evident, with German producer prices down for seven straight months.

In Britain, December retail sales sagged an unexpected 0.9%. Sales there in 1998 were the weakest in three years, up just 0.7%.

Recent attention has centered on the euro currency changeover, which was begun successfully Jan. 1 and is seen as a sizable long-term benefit. But immediate prospects are less positive.

"In the short run, the euro can't do much to offset the recessionary impact of the Asian and Latin turmoil on Europe. Actually it might worsen the impact if the euro strengthens and depresses exports," said economist Edward Yardeni at Deutsche Bank Securities Inc. in New York.

Trends in Europe, and in Brazil and elsewhere in Latin America, look like the latest consequence of what Mr. Hunt, Mr. Yardeni, and some others view as a deflationary level of excess productive capacity brought on by a decade-long international investment boom.

"Overcapacity in manufacturing is the Achilles' heel of the global economy," said economist Sung Won Sohn of Wells Fargo & Co. in San Francisco.

"Fortunately, the U.S. economy is more service-oriented than the rest of the world. Higher growth here attracts foreign capital, boosting asset prices and the dollar," he said. But the vibrant U.S. economy will eventually be dampened by events elsewhere.

The painful process of rationalizing the world's excess capacity-by either mothballing redundant capacity or raising aggregate demand-has been unfolding slowly in phases over several years.

Mr. Yardeni describes the process as a crisis in five acts, with intermissions so long that investors have several times spotted the supposed finale too soon.

As he sees it, Act I occurred during the summer and fall of 1997, when Asian currency crises broke out. Last summer, in Act II, the crises worsened, especially in Japan, and spread to Russia. Financial markets reeled. But a big "relief rally" in stocks occurred when the Federal Reserve cut U.S. interest rates.

The economist said the problems in Brazil and elsewhere in Latin America are Act III, to be followed by a European recession as Act IV. Finally, he said, he expects a U.S. recession late this year or early next year as Act V.

Mr. Hunt said events in Latin America may shift the focus back to Asia and another round of currency devaluations, possibly led by China and Hong Kong.

Even before Brazil's Jan. 12 devaluation, China's finance minister offered a bleak picture of China's economic prospects, with an export contraction possible this year. He said government efforts had been ineffective.

Mr. Hunt said the blunt statement was designed to prepare the Chinese people for a difficult year "and quite probably a currency devaluation."

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