A Strong U.S. Leads the Recovery

When Jimmy Carter arrived in London at week's end to huddle with the leaders of the world's six other major industrial nations, he brought along a hatful of news items about a quickening U.S. economic upswing that must have been both the hope and the envy of his fellow heads of government. The hope because a strong U.S. recovery can do much to wipe out the last vestiges of the 1974-75 world recession by providing a growing market for other countries' exports. The envy because the world economy sorely needs such help; outside the U.S., most industrial countries have managed only an uneven, even perilously shaky recovery.

There was one ominous item in Carter's news: U.S. wholesale prices in April rose at an annual rate of 14%, the third straight month of double-digit figures. That trend could be aggravated by rising steel costs, as two producers, Republic and Youngstown, raised prices 6.8% to 8.8% on many products. Otherwise, all signals were go. Unemployment dropped to 7% in April; that is the lowest figure in 29 months. Treasury Secretary Michael Blumenthal estimates that U.S. GNP will rise 7% in the second quarter, v. 5.2% in the first. U.S. auto sales in April climbed 12.5% above a year earlier, and consumer credit in March made its biggest one-month gain ever--$2.7 billion. Industrial production in the U.S., a key measure of economic vibrancy, is now 6.3% higher than it was before the onset of the slump in 1973.

But most other major economies remain plagued by inflation, stagnation, a dearth of investment capital and monetary imbalances caused largely by momentous outflows of funds to member states of the Organization of Petroleum Exporting Countries to cover fuel bills. A new index of "composite economic performance" compiled by the U.S. National Bureau of Economic Research, combining such measures as gross national income, output, sales and employment, shows that the summit seven as a group have largely regained their pre-recession heights of economic activity (see chart following page). But the progress is erratic. Except for the U.S., only Italy has surpassed its preslump industrial output--and Italy has other grave problems.

In general, Europe's outlook is murky. The United Nations Economic Commission for Europe predicts that Europe's real G.N.P. growth this year will average only 3%, its foreign trade will increase only 5.5% (v. 11% in 1976), and prices will rise an inflationary 9%. The message of these figures: stubbornly high unemployment will continue.

Short sketches of the situation in the six countries (excluding the U.S.) represented at the London economic summit, in rough order from strongest to weakest:

WEST GERMANY remains Europe's economic locomotive. It has just about recovered its preslump level of industrial output (97%), and its export performance is awesome; the trade surplus totaled $14 billion in 1976. But unemployment remains high at more than 1 million, or 4.6% of the labor force. Chancellor Helmut Schmidt has forecast a 5% growth rate in 1977, but several reliable economic institutes now expect a shortfall, indicating the need for stimulus. Despite fears of inflation, Schmidt is backing a $7 billion revival program with $1.5 billion to be spent this year.

JAPAN, despite a slower industrial recovery (85% of the preslump production level has been reached), is regaining its earlier vitality. The government is pumping $26 billion into the economy, mainly through big public works projects. Japan's revival distresses the European Community and the U.S. Both are pressing for voluntary Japanese curbs on some exports and greater purchases of imports. Japanese inflation, about 9.3% in 1976, is expected to cool to 7.7% or less this year.

FRANCE remains a convalescent. Though industrial output had edged upward to 89% of prerecession heights, inflation remains at 10% annually. Unemployment, at more than 1 million, or just below 5% of the labor force, is unacceptably high, providing the Communist-Socialist alliance with ammunition. Refusing to yield to pressures for a major reflation, Premier Raymond Barre now plans to pump only a modest $800 million into the economy during the next year. Businessmen, fearing a victory of the Communist-Socialist alliance in the 1978 elections, are delaying investments.

CANADA is handicapped by high labor costs, pushed upward by four years of inflation., Canadian goods are being priced out of the world market, creating a sizable trade deficit ($1.1 billion in 1976), a flight of investment capital and a fall in the value of the Canadian dollar (it is now worth only 94-c--96-c- U.S., compared with $1.03 in late 1976). At 8.1% of the work force, unemployment is the highest since the government began collecting figures in 1953.

ITALY has confounded numerous doomsayers simply by surviving. Now the country appears to be regaining strength. In addition to its vigorous industrial recovery, tourism, which is Italy's biggest earner of foreign currency, is thriving. As gestures of support, the International Monetary Fund has just approved a $530 million stand-by loan, and the European Community has put up $500 million. The lira, artificially propped up by tight controls for the past year, once again is being traded on the free market and is holding steady at 882 to the dollar. But an unchecked inflation, now running at 21.8% a year, threatens these achievements. In order to check prices, Premier Giulio Andreotti is planning to reduce economic growth to zero this year.

BRITAIN remains a problem child, beset by just about every possible economic ill: falling productivity, high inflation (15.1% in 1976), a dismally low growth rate (1.5% predicted for 1977), and a currency that is only a shadow of its former self. Still, Labor Prime Minister James Callaghan and his predecessor Harold Wilson have managed to pull the country out of even graver conditions, and the increasing flow of North Sea oil may yet rescue Britain from its present economic poorhouse.

Many other countries are far worse off than Italy and Britain. The root cause of their problem: soaring oil bills caused by OPEC's quintupled prices. While a small handful of OPEC countries have been amassing a $150 billion balance of payments surplus, the non-oil producing less developed countries, or LDCs, have plunged into debt by almost the same amount--$142 billion--to pay for petroleum. In only three more years, that debt load is expected to rise to a staggering $241 billion.

London was the third economic summit within 18 months. The two previous ones were highly unspectacular. France's Giscard convened the first at Chateau de Rambouillet in November 1975, and the leaders ringingly declared that they would no longer permit wild currency fluctuations. Within weeks, sudden plunges of the lira, pound and French franc created chaos on the foreign exchange markets. In June 1976 Gerald Ford acted as host for the second summit, in Puerto Rico. There, the leaders pledged to guard against an overheating of the recovery. Even as they spoke, the recovery was slipping into a stagflation.

Will London eventually prove to have better results for the world economy? Though the actual accomplishments of the summit cannot be judged for months, there is some reason for hope. Carter and his international economic advisers are definitely more committed to the concept of economic interdependence than were their Republican counterparts.

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