As the world economy turns: creaky outlook
Boston — Unfortunately, the world economy does not turn on a dime. Most economists are now predicting an end in the new year to the widespread recession in the industrial nations. But it will be a ponderous turn, like that of a football player in slow motion.
Wharton Econometric Forecasting Associates, for instance, has just revised its forecasts downward and now sees ''significantly less vigorous growth for 1983, with lower-than-normal recovery rates showing up in growth rates for 1984 and beyond." (See chart.)
Another forecasting organization, Data Resources Inc., is predicting growth in real gross national product (GNP), the total output of goods and services, in the range of 1 to 3 percent next year in most regions of the world. Those are not handsome rates.
Citibank economists are slightly more optimistic, projecting a 3.8 percent increase in real GNP in the seven major industrial countries (the United States, Canada, Japan, West Germany, France, the United Kingdom, and Italy).
Economists with the Organization for Economic Cooperation and Development are even more gloomy, predicting 13/4 percent growth for its industrial members in the first half of 1983 and only 2 3/4 percent growth for the second half of the year and for all of '84.
Whatever, such modest growth rates mean that the world will be troubled with high unemployment rates for two years or so.
Citibank's relatively cheery forecast hangs on the ''decidedly stimulative turn'' in monetary policy taken in the US, Japan, West Germany, and Britain. In the US, the basic money supply (M-1) has been growing at a 15 percent annual rate for the past four months. Since May 1982, the relevant monetary aggregates have been growing in Japan at a 9 percent rate and in Britain at 11 percent. In Germany, a measure called ''central bank money'' has grown nearly 7 percent since November 1981.
Why are the economists so modest in their hopes for the world economy?
Here are three reasons:
* The impact of persistently high real interest rates - rates after subtracting the inflation rate. Real rates remain high in Europe and Canada, as well as in the US.
* The fact that some of the major developing countries, such as Brazil, Mexico, and Argentina, are slowing their economic growth and their imports so as to manage their debt repayment problems better. This will hurt significantly the exports of the industrial countries.
* What they see as the continuing commitment of governmental policymakers to anti-inflation policies.
Citibank economist Alan Murray says his faith in this anti-inflation policy is weakening. Nonetheless, he still regards it as the most likely alternative that central bankers and other officials will slow down their expansionary measures once their economies show signs of an upturn.
His colleague, Peter Crawford, figures that in the US the Federal Reserve System can get away with about two quarters of fast money growth without restimulating inflation. Beyond that, prices and interest rates could start moving up again at a fast pace.
Last week the Fed dropped the discount rate - the rate it charges for loans to commercial banks - from 9 to 8.5 percent in an effort to push down market interest rates. So far, however, the move has had little impact. Mr. Murray wonders if this might be because of an increasing suspicion in the financial markets that the nation is in danger of returning to an inflationary environment.
The problem, he notes, is that no one really knows the ''point of no return'' - the length of time for a stimulative monetary policy to restart inflation.
As for the trade situation, John W. Sewell, president of the Overseas Development Council, noted in an interview: ''Americans fail to realize that the developing countries now buy nearly 40 percent of our exports and that 11 of our top 20 markets are in the third world. If we don't worry about their economic health, the cost to us will be direct and considerable.''
In the decade of the 1970s, the 40 or so middle-income developing countries accounted for more economic growth in the world than the United States and as much as West Germany and Japan combined.
Lawrence Krause of the Brookings Institution has estimated in a Goldman, Sachs publication that if the industrial countries provide no net new lending to the developing countries next year, it will cost these nations 3 percent in growth - and it will reduce world trade by $50 billion and trim the growth of GNP in the United States by 1.5 percent.
In other words, the nations of the world have become highly dependent on one another's economic welfare. Prosperity is becoming more and more indivisible.
That's why a group of 26 leading economists from 14 countries united in a statement last week calling for ''an internationally coordinated shift toward expansion in the near-term stance of fiscal and monetary policy.'' The group, brought together by the Institute for International Economics in Washington, was cautious enough to suggest that monetary expansion should occur through a one-time upward step in the money supply followed by a return to the usual pattern of modest monetary growth. And a boost in government spending should generally occur through a one-time public investment in ''infrastructure'' (highways, bridges, public transit, ports, etc.) rather than an expansion of transfer payments (welfare, children's allowances, etc.). The group does not want to have inflation revived.
To some degree, most industrial nations have already taken expansionary steps. Moreover, US government officials have become more forthcoming in their actions to help the developing countries out of their debt predicament.
So the world economy will expand. But if the economists are right, it will not be a booming '83.
A sluggish recovery? Growth of gross domestic product (Percentage increase after inflation) Recovery Faltering Sluggish recovery growth 1975-79 1981-82* 1982-83+ 1983-87+ World 4.3 0.3 2.0 3.2 Developed countries 4.0 -0.1 1.8 2.9 US 4.5 -1.4 2.4 3.4 Japan 5.2 2.9 3.1 2.6 Europe 3.4 0.5 1.0 2.5 West Germany 4.0 -0.7 0.2 2.0 Developing countries 5.1 0.5 2.0 4.6 Oil exporting 4.8 -1.5 1.0 4.8 Oil importing 5.2 1.0 2.3 4.6 Centrally planned economies 4.6 1.9 2.6 2.9 *Estimates; forecasts Source: Wharton Econometric Forecasting Associates