Stagnation Hits Major Nations At Same Time
Some analysts say central banks in Germany, US overtighten money supply, choke growth. WORLD SLUMP
BOSTON — RENEWED recession threatens the global econ-omy.
That's the view of some economists. "We are entering into a big crisis," says Sam Nakagama, a Wall Street economist. "Not only is the United States economy in a mini-depression, but the European and Japanese slumps are now getting worse."
Dr. Nakagama, who is definitely not a professional doomsayer, is more gloomy than most analysts. Many economists, however, are becoming more concerned about the outlook in the major industrial nations.
A survey this month of 44 forecasters in the US and abroad by Globescope (Glen Carbon, Ill.) found that on average they had marked down their predictions slightly for five countries. "Expectations for growth worldwide for 1992 remain low," notes editor James Buhr.
The consensus of these economists predicts growth of output in the US of a real 1.9 percent this year, in Canada 1.9 percent, Japan 2.1 percent, Germany 1.6 percent, France 1.9 percent, Britain 0.5 percent, and Spain 2.5 percent - all modest numbers.
"Overall, it is not a good strong recovery," says Geoffrey Moore, director of the Center for International Business Cycle Research at Columbia University.
The latest statistics have not been favorable. In the US, construction of single-family homes and apartments fell 2.8 percent in July. Wang Laboratories Inc., once a major computer company, filed last week for bankruptcy.
In Japan, prices have plunged to another low on the Tokyo Stock Exchange. The 225-issue Nikkei stock average reached its lowest close last Tuesday since March 12, 1986. Despite a slight recovery since then, the current decline has sunk prices by 60 percent.
The world slowdown has hurt Japanese companies. Sony Corporation and Pioneer Electronic Corporation last week reported sharp declines in profits during the spring quarter. Nakagama expects a real recession in Japan, with an actual drop in output rather than the usual slowdown in the growth rate to perhaps 3 percent.
Economist David Wyss of DRI/McGraw-Hill says it is "quite possible" the Japanese economy could turn negative, though his Lexington, Mass., consulting firm still has an official prediction of modest growth.
In Germany, the other big economic engine in the world, the Bundesbank, the nation's central bank, has boosted interest rates dramatically to slow money-supply growth and inflation. The result has been a pronounced economic slowdown. June data indicate industrial production 5.7 percent below the year-earlier level. Auto sales were down 16 percent.
The German Economic Research Institute last week predicted western Germany's output of goods and services will fall 0.5 percent in the third quarter from the second quarter, which was already down.
Nakagama warns that the weaker German economy will have ripple effects in Europe. The unemployment rate is already 10 percent in France, 11 percent in Italy, 9.6 percent in Britain, 14.5 percent in Spain, and 8.1 percent in Belgium.
Nations that are part of the European Community's Exchange Rate Mechanism must maintain high domestic interest rates - despite such high unemployment rates and low growth rates - to keep their currencies from falling in value in relation to the German mark.
Nakagama says it would be "unwise" for these countries to do nothing while waiting for the Bundesbank to ease its monetary policy.
But most European economic policymakers apparently are awaiting the results of a French referendum on the Maastricht Treaty for the political, economic, and monetary unification of Europe on Sept. 20 before making any decisions.
Even then, the Bundesbank may take its time before relaxing its monetary policy. Germany, says John Mueller, chief economist at the Arlington, Va., consulting firm of Lehrman Bell Mueller Cannon Inc., "will be a long time in the valley."
Perhaps the greatest concern among economists has been the weak recovery in the US - the country with the world's largest economy. Nakagama uses the term "mini-depression" not because of the depth of the slump (the recession that technically ended last year was about average in its decline in output) but because of its length. The growth in output during the four years of the Bush administration will be about 3.6 percent, decidedly the worst performance for any presidential term since the 1944-48 term of
Franklin Roosevelt and Harry Truman.
Nakagama blames the stagnation on the Federal Reserve for failing to keep the money supply (M2) growing. Paul McCracken, former chief economic adviser in the Nixon administration, charges the Fed with striving for a zero inflation rate at the cost of high unemployment and says monetary policy is the "most perverse" since a similar policy caused the Great Depression.
"That is an overarching decision of national economic policy that is not for the Fed to make," he says in a telephone interview. Congress, he adds, should hold hearings in regard to the price level because such a stern monetary policy would involve major social and economic trauma. Without a real growth rate of at least 2.5 percent, he says, unemployment will continue to rise in the US.