In the Shadow of a New Global Slump

By Carter to the leaders of the industrialized world for a new economic summit soon after he takes office in January.

One of the notable achievements of the brief Ford Administration has been its success in selling foreign governments on a go-slow approach to economic growth in order to hold down world inflation. At the economic summit in Puerto Rico last June, President Gerald Ford and the government chiefs of Britain, West Germany, France, Italy, Canada and Japan agreed that they would follow cautious policies aimed at a moderate annual expansion of world production, say 5%, through 1980. Today it appears that the Administration was altogether too persuasive: in most industrial countries, as in the U.S., expansion has slowed to a crawl, and the quiet optimism of the Puerto Rico meeting has given way to a galloping case of global jitters. Although inflation remains high (9.7% in Japan, 14.7% in Britain), the big worry among economists and politicians now is the possibility of a new global recession. Says C. Fred Bergsten, one of President-elect Jimmy Carter's experts on international economics: "The chances of aborting the world recovery are fairly high unless we get some thoughtful policies here and abroad."

What Bergsten and many other economists would like to see is a synchronized effort by the U.S., West Germany and Japan to speed up their economies by adopting such expansionary policies as tax cuts and higher government spending. These three kingpin economies could then buy more from other countries and, in Bergsten's words, "help the weaker industrial nations achieve export-led growth." The chances of this happening are problematic.

Jimmy Carter is, of course, committed to revving up the U.S. economy. But West German leaders, worried, as always, about inflation, are wary of stimulative policies, and Japan has taken only a modest turn toward expansion.

In several other countries (Britain, France, Italy, Canada), the governments are pursuing austerity programs that are holding down production and jobs. Worldwide, the consumer spending boom that opened the year has fizzled as it became apparent that unemployment and inflation would not come down quickly. Businessmen in the U.S., Europe and Japan, still shaken by the 1974-75 recession, have failed to invest in new plant and equipment anywhere near as rapidly as had been expected.

Aggravating Strain. The upshot: Chase Econometrics, a private research firm, forecasts that economic expansion in 12 major nations will slow, on average, from 5.5% this year to 4.5% in 1977. In Europe, it predicts, growth will slip from an already modest 4.2% in 1976 to 3.9% next year. While such a slowdown would still be a long way from outright recession, it would aggravate already serious commercial and political strains throughout the non-Communist world.

For example, as sales become harder to make at home, businessmen are increasingly engaged in a bruising scramble to boost exports. Their efforts have led to a fresh surge of protectionist sentiment. British unions, for example, are demanding stringent import curbs to protect workers' jobs, and in the U.S. business groups are lobbying for limits on imports of shoes and color TVs. Over lunch last week in Brussels, angry officials of the European Community bluntly warned Japanese representatives that they would close the door to some Japanese goods unless the country moves swiftly to reduce its mammoth $4.2 billion annual surplus in trade with Europe. Discontent over inflation and unemployment is shaking governments in Britain and Italy, fomenting rising left-wing sentiment in France, and rekindling separatist dreams in Canada.

The shock that could turn sluggishness into recession could come from another big hike in world oil prices by the Organization of Petroleum Exporting Countries, which has scheduled a price meeting in Qatar for Dec. 15. Last week talk swirled around the world that OPEC might post only a small interim increase (5% or so) or even delay any rise until next year. Oil-burning countries can only hope that OPEC does hold off. The U.S. State Department, which has been waging an unusual public campaign to forestall an oil increase, warns that a 15% boost would cut a full percentage point off the economic growth rate in the seven biggest consuming countries, while adding two percentage points to inflation rates.

Even without an OPEC increase, the world economy is shaky. The situation in the most important countries:

THE U.S. is in a deepening business lull. The Government reported last week that real gross national product--total output, adjusted for inflation--rose only 3.8% in the third quarter, rather than 4% as was first estimated. Industrial production fell .5% in October, the second straight monthly decline, and housing starts also dipped. Carter in January is likely to propose a $10 billion to $15 billion tax cut to pep up demand; his chief economic adviser, Lawrence R. Klein, has said that the country may need an annual growth rate of 7% to reduce unemployment significantly.

BRITAIN, with its faltering production, oppressive rate of inflation, high unemployment (5.5%) and staggering debt, remains one of Western Europe's sickest economies. The value of the pound has plummeted to historic lows, going from $2.03 in January to $1.68 last week, despite the ruling Labor Party's vigorous efforts to hold down wages and increase output and exports. After the latest currency crisis in September, Whitehall was forced to ask the International Monetary Fund for a $3.9 billion loan. If approved, the loan is likely to be accompanied by strict requirements that Britain hold down its money supply, which could require slashes in its expensive program of social services. That could infuriate British unions, without whose support the government cannot stay in office. Last week, tens of thousands of workers marched on the House of Commons to protest any additional cuts in public spending.

WEST GERMANY remains by far the strongest economy in Europe. It enjoys the lowest inflation rate (3.8% as of October) of any major industrial power, and it will meet this year's growth target of 6%. Despite constant rises in the value of the mark--it has gone up more than 8% against the dollar since January --West German goods have continued to be competitive in world markets because high labor productivity has held down production costs and exports are booming. In September the nation posted a trade surplus of $1.9 billion, its second biggest ever. But unemployment remains relatively high by West German standards at 4.1%, mainly because unskilled women and youths are entering the market faster than jobs are being provided for them. For next year, Chase Econometrics foresees a drop in the growth rate to 4.6%, but West German economists disagree; they expect a fresh burst of consumer spending and a pickup in business investment to keep the economy moving up at a brisk pace.

FRANCE, after a vibrant first half, stumbled into a period of sputtering expansion. At the same time, inflation continued to climb at a rate of 10%. The value of the franc fell, forcing President Valery Giscard d'Estaing to decree a fresh austerity plan. The new measures include a temporary price freeze, a 4% increase in personal and corporate income taxes and tight curbs on credit. At the core is a 6.5% limit on wage boosts. Eternally skeptical French businessmen believe that the new plan will fail because Giscard will resort to the time-honored device of revving up the economy prior to the 1978 elections.

ITALY, like Britain, is one of Europe's economic disaster areas. Inflation is racing at a rate of almost 18%, and the trade deficit for the first nine months of this year has doubled, to $4.4 billion. To halt the slide toward disaster, the government has adopted a savage deflationary policy that some economists fear could result in zero economic growth next year (Chase Econometrics disagrees). The austerity program will hold down wages, boost taxes, and raise prices on government-controlled goods and services, such as electricity. Some economists oppose the crackdown, arguing that the proper way to bridge the gap in trade is to boost production and increase demand at home. The nation's glum mood is summed up by former Deputy Prime Minister Ugo La Malfa, who says: "The errors of politicians and the unions have made us a country without prospects."

CANADA had hoped that an expanding U.S. economy would lift its exports and let the government pursue its single-minded effort to wrestle down inflation, largely by holding economic growth to modest levels. But the American market stagnated and so has Canada's recovery. The rate of price rises has indeed been cut from 10.6% last year to 6.2% at present, but at a severe cost. Unemployment stands at 7.6%, the highest in 15 years, consumer spending is flat, and capital outlays, which had been projected to increase 32% this year, are now expected to rise by only 12%. In the Quebec provincial election last week, the separatist Parti Quebecois won a stunning victory by playing heavily on discontent over economic mismanagement and untrustworthiness in government (see THE WORLD).

JAPAN has been hit by a drop in domestic demand. The rate of expansion of the nation's G.N.P. fell from a muscular 13.4% in the first quarter to an estimated 4.1% in the third. To take up the slack, Japan has deluged world markets with its goods, notably autos and TV sets; exports to the U.S. and Europe are running about 50% ahead of a year ago. Two weeks ago, Premier Takeo Miki announced that his government would start a new $3.4 billion pump-priming effort to jog domestic demands and make the country less dependent on exports. One plus factor: corporate profits are way up, and that means big year-end bonuses and a surge of consumer spending.

Finding a way out of the worldwide economic malaise will be one of the first major challenges facing the incoming Carter Administration. Reason: if the global slowdown is permitted to deepen, if protectionist measures spread and invite retaliation, and if OPEC posts a stiff price increase, the threat of world recession will become imminent--and the U.S. would not be immune. Faster growth in the U.S. itself is the first necessity, globally as well as domestically, but the U.S. cannot do the job alone. Other strong countries must be persuaded to speed up too, and some way must be found to help nations like Britain and Italy that are too hemmed in by inflation and foreign debt to risk adopting expansionary policies on their own. The situation is serious and complicated enough to warrant a call by Carter to the leaders of the industrialized world for a new economic summit soon after he takes office in January.

This file is automatically generated by a robot program, so viewer discretion is required.