Germany Will Join 1994 World Recovery
LAST year, world output of goods and services grew a bit more than 2 percent - modest indeed considering population growth. The volume of world trade rose less than 3 percent, down from 4 percent the year before.
But 1994 will be better economically, economists predict.
In the United States, the recovery already has become more vigorous. Contrary to conventional wisdom, writes Lawrence Kudlow, chief economist of Bear, Stearns & Co. in New York, the Federal Reserve's small hike in short-term interest rates last Friday will quicken, not restrain, economic activity.
``Why?'' Mr. Kudlow asks. ``Because consumers and businesses will now shift interest expectations, including loan financing costs.... Many have been waiting for lower interest rates and loan costs. After [the] Fed action, they will no longer wait. Consequently, spending decisions will be accelerated, and first-half economic growth will likely be stronger.''
The economies of both Canada and Britain are recovering. And, says Martin Hufner, chief economist at Bayerische Vereinsbank AG in Munich, Germany, continental Europe will emerge from recession in the second half of 1994. He's expecting the western German economy to grow 1 percent after inflation this year, and eastern Germany 7 to 8 percent, adding up to about 1.5 percent for all of Germany. The jump in the number of jobless German workers to above 4 million, a postwar record announced Tuesday, was not surprising, he says.
Japan's output will be flat, with recovery not coming until the end of 1994, Dr. Hufner forecasts.
Japanese Prime Minister Morihiro Hosokawa this week negotiated a $140 billion fiscal stimulus plan equivalent to 2.2 percent of total national output, including a $50.3 billion cut in income taxes. Yet there is considerable skepticism that the package will revive the economy.
One reason is that the tax cut is for one year only. ``If economists know anything with certainty, it is that a tax cut that is announced as a temporary measure has no affect on people's assessment of their permanent incomes, and thus it is almost totally ineffective in stimulating demand,'' notes Carl Weinberg, chief economist at High Frequency Economics in New York.
Moreover, banks and other corporations are still suffering from financial illiquidity after the Japanese bubble in stock and real estate prices burst. ``Until and unless the government addresses the banks' problems directly, and this plan clearly helps, we do not see how a `normal' economic recovery can be expected,'' Mr. Weinberg maintains.
Hufner sees four structural changes under way in Germany:
1. Since Germany's reunification in 1988, exports as a proportion of total German output have declined from 31 percent to 22 percent. With 80 million domestic consumers spending more than $1.26 trillion a year, Germany has the largest domestic market in Europe and the third-largest in the world after the US and Japan. The German economy has become more like that of these other industrial giants. So recovery will come more from a rise in domestic consumption than from growth in exports.
2. The burden of reunification on the Germany economy is declining. Output in eastern Germany has grown by more than 20 percent in real terms since 1990. The gain in 1993 alone, at a time of recession in western Germany, was 6.3 percent.
Eastern Germany will still need financial help from rich western Germany, Hufner says. But that investment will soon start producing a return in higher tax revenues and rising employment.
3. German monetary policy has become more pragmatic. ``Policy is no longer searching under every pebble for inflation,'' he says. He attributes this to changed leadership at the Bundesbank, Germany's central bank, including more internationally experienced members on the policymaking Central Bank Council.
As a result, German short-term interest rates will fall further, he predicts. That will help boost Europe's economy.
4. In the past, the ``Made in Germany'' label stood for punctuality, reliability, quality, and good service. Now, Hufner says, new German strengths are coming to the fore: flexibility and adaptability. Productivity in manufacturing rose 10 percent last year, reflecting layoffs and other major restructuring measures.