Currency Crisis Could Be Boon To Britain, Italy

Meanwhile, US recovery remains sluggish, and Japan turns to a public-works stimulus. WORLD ECONOMY

THE world economic picture is still moving in slow motion. But the currency devaluations in Western Europe this month, and a public-works program in Japan, may speed up the projector.

"Finally, European countries have the opportunity to follow policies that will get them out of their high rates of unemployment," says Paul McCracken, chairman of the Council of Economic Advisers under President Nixon.

The United States economy, however, shows no signs of great vigor. "In the near term, it will be more of the same - dragging along, not going into a recession, but not going anywhere either," says Dr. McCracken, now a professor emeritus at the University of Michigan.

Last week, US government statistics showed orders for durable goods falling in August; personal income declining in the same month because of Hurricane Andrew; housing starts rising 10 percent in August; and real national output growing at a weak 1.5 percent annual rate in the second quarter. A survey by the Federal Reserve's 12 regional banks found economic activity slowly and unevenly improving.

"Fifteen months after its 1990 low, GDP [gross domestic product] has yet to exceed its pre-recession 1990 high," notes Leonard Lempert of Statistical Indicator Associates in North Egremont, Mass.

That was not the case after the four previous recessions.

A survey by Globescope Publications of Glen Carbon, Ill., earlier this month found economists marking down modestly their forecasts for growth in real national output this year for the US, Japan, Germany, Britain, Spain, and Brazil. They also became more pessimistic in their 1993 forecasts for these countries, France, and Italy.

By devaluing and floating their currencies in relation to the German mark, Britain and Italy are freer to stimulate their domestic economies. Britain, mired in the most prolonged economic downturn since the 1930s, has already cut its interest rates.

"The global economy stands a chance to benefit from the actions of those greedy foreign-exchange rate speculators," says Paul Kasriel, an economist with Northern Trust Company in Chicago.

With volume on the foreign-exchange markets grown to $1 trillion per day, it is becoming more difficult for central banks to maintain fixed exchange rates. If speculators and investors figure a currency should be devalued, they see the sale of that currency as a safe bet offering the potential for handsome profits.

Nonetheless, France and Germany last week successfully resisted the pressure of speculation against the franc. Analysts said it was likely the foreign-exchange markets will be calmer this week.

IN Japan, the growth of real gross national product in the three months ending June 30 was a sluggish 1.1 percent annual rate. The government last month announced a stimulus package of public works and other measures amounting to $86.3 billion. It aims at 3.5 percent growth in this fiscal year. Many economists expect less growth.

In the US, the view that election years are always boom years has been proved a myth. "Neither presidents nor Congresses run economies by themselves," writes Mr. Lempert. "It is not possible for anyone to manipulate the economy to one's liking."

Economists see several factors holding up the economic recovery. Dr. McCracken criticizes the Federal Reserve for not getting the nation's money supply growing adequately. "We are supposed to have a central bank that adjusts the supply of money to the needs of the economy," he says. "I don't think we have this time."

Another problem is the reluctance of banks to make commercial and industrial loans with government regulators looking over their shoulders. "Bank regulators, not diligent in their surveillance earlier, are intent on showing how macho and tight they can be now," McCracken says.

Michael Keran, chief economist of Prudential Economics, says the imposition of risk-based capital standards on bank loans has reduced real gross domestic product by 5 percentage points in the three years ending 1991 and will do so by an additional 1.5 percentage points this year. He says the Bush administration is a victim of its own inaction in not showing more regulatory flexibility in this regard.

Ethan Siegal, a Washington analyst for Prudential Securities, speculates that President Bush could plan an October surprise, calling on Congress to pass an emergency "Jobs And Capital Formation Act of 1992 "to stimulate the economy. However, Herbert Stein, who succeeded McCracken as chief economic adviser to Nixon, doubts that such fiscal action will happen. "Bush has so many commitments about cutting taxes and balancing the budget," he says. "It would look too cooked up to do it in the four weeks before

an election."

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