US recovery brightens prospects for global economy
Boston — It's not only the United States that is enjoying economic recovery; it is most of the world. After the US Department of Commerce last week reported that the output of US goods and services grew at an annual rate of 8.7 percent in the second quarter, President Reagan commented that the economy is ''growing with more vigor than most economists predicted.''
Now economists are sounding more cheery about prospects in Western Europe and the developing countries. Comments economist Shea Smith III: ''It is . . . probably just a matter of time before the US recovery will pull along greater-than-anticipated recovery in the other industrialized nations of the free world.'' Mr. Smith keeps track of some 41 corporate, bank, consulting, or official forecasts for a newsletter called Blue Chip Economic Worldscan (P.O. Box 1659, Sedona, Ariz. 86336).
Even the Soviet Union appears to have joined the recovery parade. The Central Statistical Board reported in Moscow Friday that during the first six months of this year, the value of goods produced was 4.1 percent higher than the corresponding period of 1982.
''Organization and labor discipline were improved,'' the Soviet report said in line with the theme of President Yuri Andropov's attempt to revive the Soviet economy.
In Paris, the Organization for Economic Cooperation and Development this month shifted its forecast for growth in real output in the noncommunist industrial countries as a whole to a 3.5 percent annual rate in the second half of 1983 and 3 percent or slightly above in 1984. That was a touch higher than its forecast last December.
States the OECD report: ''A recovery of demand and output in the OECD area finally appears to be under way.''
Similarly, Wharton Econometric Forecasting Associates, in its July outlook, says the world economy in 1983 will grow 2.1 percent in real terms (after removing the impact of inflation) as compared with 1982. That is up slightly from 2 percent in its May forecast. World growth will accelerate to 2.9 percent next year, the consulting service predicts.
Worldscan's July consensus (average) predicts the recovery will continue in all the major industrial countries next year. Real output in West Germany, for example, is now expected to rise 2.7 percent in 1984 over 1983. The corresponding consensus for other countries includes: France, 1.5 percent; United Kingdom, 2.3 percent; Italy, 2.4 percent; Brazil, 1.5 percent; Mexico, 1. 5 percent; Japan, 4.1 percent; Australia, 2.6 percent; Canada, 4 percent; and the US, 4.4 percent. The UK is showing more growth than many anticipated. But France and Italy are in the midst of austerity programs. West Germany's recovery has been slower than anticipated. And Japan is growing slowly by its own past standards.
''The United States is acting as the single locomotive for the world,'' says Roger C. Bird at Wharton Econometric.
Concerns that the world recovery could be aborted by high US interest rates are fading. Ramachandra Bhagavatula, a Citibank international economist, writes in Citicorp World Outlook: ''With inflation low and still trending down, it looks as though any return to sustained policy restraint is some years away. So the outlook is for sustained moderate economic growth in 1983-84.''
Further assurance for continued recovery was given last week when Paul A. Volcker, chairman of the powerful Federal Reserve Board, told a congressional committee that the central bank would not permit a continuation of the rapid growth in the nation's money supply that occurred during the first half of the year. But the Fed also had decided, he said, that the ''target'' for growth in the money supply would be hiked a little for the rest of the year.
The stock market interpreted this favorably, figuring the Fed was aiming for modest monetary restraint but would avoid the danger of tightening so hard as to stifle the US recovery - and damage the world recovery. The stock market interpreted this favorably, with the Dow Jones industrial average moving up 38. 86 points for the week.
Economists still have some worries. Worldscan asked its panelists for their opinion on where concentration should be placed to sustain recovery. The need to halt spreading trade protectionism scored the highest. Three other suggestions, possibly somewhat contradictory, scored about the same: use monetary targets to control inflation; keep real interest rates down; and establish flexible money supply targets. Few of the forecasters suggested trying to reflate the world economy with easier fiscal or monetary policy.
Indeed, Citibank's Mr. Bhagavatula finds that those nations that have maintained low inflation rates enjoy, on average, higher growth rates than those countries with higher inflation. This is because the low-inflation nations have longer lasting and more durable recoveries. High inflation countries have to put on the brakes more often to prevent inflation from accelerating. He advises that ''patience and moderation in economic policies during the recovery will go far toward reducing both the probability and the severity of future economic downturns.''