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World Hopes to Avoid US Slump

By David R. FrancisStaff writer of The Christian Science Monitor / January 2, 1991


THE economic and financial situation in the world is hardly boring at the start of 1991. The United States is in a recession. Abroad, the economic picture is mixed.

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A potential war with Iraq could further upset oil prices.

The Uruguay Round of international trade negotiations must be restarted after suspension of the talks last month.

In the Soviet Union and Eastern Europe, governments are struggling to lead their national economies through considerable chaos into greater prosperity based on free-market principles.

Many commercial banks in the US are swimming hard to keep their heads above troubled financial waters.

Wall Street, after a wild but prosperous decade, faces the discipline of sharply lower income.

Here's the outlook in these sectors:

The Economy: In the US, economists are counting on the Federal Reserve System to ease monetary policy to give the economy a boost later this year.

Almost half the 50 US economists surveyed by Blue Chip Economic Indicators (Sedona, Ariz.) now forecast zero growth or less in the output of goods and services in 1991 as compared with 1990. That implies an outright contraction in the first part of the year. The consensus of the 50 figures real gross national product (after inflation) fell in the last quarter of 1990, and will contract again in the first three months of 1991. They foresee modest renewed growth in the second quarter. For the year 1991, the consensus predicts real growth of a mere 0.3 percent. Much will depend on what happens in the Gulf.

A survey by Globescope (Glen Carbon, Ill.) of 49 economists here and abroad finds the world economy slowing. Their average forecast sees growth in real terms in 1991 of 1 percent in Canada, 3.8 percent in Japan, 3 percent in Germany, 2.4 percent in France, 2.3 percent in Italy, 1.2 percent in Britain, 3 percent in Spain, 1.8 percent in Australia, 3.7 percent in Mexico, and 1.4 percent in Brazil.

Those forecasts are close to those late last month of the Organization for Economic Cooperation and Development (OECD), the club of 24 industrial democracies. Economists at the Paris-based organization say that robust growth in Japan and Germany should prevent the troubles in the US economy from dragging the world into recession.

Unemployment in the US, the OECD predicts, will rise to 6.4 percent this year and 6.7 percent in 1992. Canada, Britain, Sweden, Finland, New Zealand, and Iceland are expected to join the US in recession or a slump close to recession in severity.

The OECD economists hold that the ``shock'' in oil prices from the Gulf crisis will do less damage to the world than the oil shocks in the 1970s. That's because the rise in oil prices is substantially less and because the exposure of the OECD economies, in terms of oil use per unit of output, has fallen considerably since 1973.

Energy: Most analysts expect oil prices to drop sharply if peace comes to the Middle East. In recent months, Saudi Arabia and other oil producers have made up for the loss of crude production from Iraq and Kuwait. So the world would quickly face an oversupply of oil should Iraq and Kuwait reenter the export market.

However, the Organization of Petroleum Exporting Countries, meeting in Vienna on Dec. 12, agreed to restore output quotas once the crisis is over. The oil exports of 11 of OPEC's 13 members are now at a little more than 23 million barrels a day, which is about 500,000 over the 22.5 million quota for all 13 countries.

If war does break out, fear of damage, if not actual damage, to the oil facilities of Saudi Arabia and the Gulf sheikdoms could send oil prices to new high levels, the experts reckon.

President Bush is expected to present his administration's energy policy late this month.