For World Economy, the Worst of Recession Has Passed

FOR many nations, the worst of the economic slump is over.

``The world economy has bottomed out,'' notes Rudi Dornbusch, a Massachusetts Institute of Technology (MIT) economist who takes a monthly look at global economic trends for a number of corporations.

After a slow first half, the United States recovery has accelerated. Some economists are talking of a real 4 percent or better growth rate this quarter. The monthly survey of members of the National Association of Purchasing Management found a ``healthy increase'' in both manufacturing and the overall economy in November. There is something of a debate among forecasters as to whether the growth in the first half of 1993 will remain vigorous or slow down as it did in the winter of 1993. Mr. Dornbusch is cautious, suggesting 2.75 percent to 3 percent real growth in the next 12 months.

Easy money will countervail fiscal restraint, he says.

Business is picking up in Canada and Britain also. Canada should have around 2.7 percent real growth this year. The new British budget, announced this week, assumes a real growth rate next year of 2.5 percent.

But on the European continent, the situation is less happy. ``The economic climate has deteriorated further, albeit at a declining rate,'' a European Community report commented recently. ``There are still few signs of a cyclical turning point being reached.''

``The Bundesbank continues to call the shots,'' Dornbusch says, referring to Germany's central bank. It has been gradually lowering interest rates all year, but not fast enough to satisfy its neighbors. Dornbusch argues that real interest rates, which take into account inflation, are too high in Germany. Producer prices have fallen for six months there, so interest rates of 6.4 percent are ``extremely high for an economy that is not growing,'' he says.

For 18 months economists have been revising their forecasts down for continental Europe. Dornbusch figures, ``The bottom may have been reached, but a strong upswing is implausible.''

The MIT economist criticizes the French government for strangling the economy with high interest rates in order to keep the franc strong against the German deutsche mark. As a result, Dornbusch predicts, France will experience rising unemployment in 1993, 1994, and 1995. And mass unemployment will worsen France's budget deficit and the prospect for tax cuts or more government spending to boost the economy. ``France will do very poorly,'' he concludes.

By contrast, Dornbusch describes Italy as ``the most promising economy in Europe.'' That is because it abandoned its effort to keep parity with the deutsche mark and the European Monetary System in 1992. The resulting devaluation of the lira has made Italian business ``highly competitive.'' But growth is slack because of major political and industrial restructuring.

Canada's new Liberal government ``has to start rebuilding the economy,'' Dornbusch writes. ``Public finance is rotten; industry is dull. But ... there is an understanding of what has to happen.''

Inflation is lower in Canada than in the US, allowing the Bank of Canada to lower interest rates over the next year without much risk of a rout for the Canadian dollar on foreign exchange markets.

The Japanese economy remains in trouble, with output falling two quarters in a row for the first time in decades. An appreciation of more than 15 percent in real terms in the yen over the past two years has hurt Japanese competitiveness, Dornbusch notes. The fiscal package to stimulate the economy, to be implemented next April, ``will help some but not much.''

At best, Dornbusch predicts, the Japanese economy will grow a real 1 percent next year. ``Japan is in a situation which business is singularly ill-equipped to handle. The entire belief system of decades - superiority of the Japanese culture and business system, sustained growth, social cohesion, lifetime employment, accommodating finance, the US can be managed - are all up for grabs. Bad news!''

Outside Japan, Asia booms. China tried to slow down its economy, but apparently abandoned that effort at a Communist Party meeting last month. Growth in national output is expected to run at an astonishing 13 percent this year.

South Korea has its woes, and so do a few other economies, Dornbusch notes. But ``there are no major obstacles to continued growth in Asia: savings rates are high, access to external capital is plentiful, and the world trading system is staying open. Asia cannot fail to do well.''

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