The world economy [September 1990]

View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by University of Strathclyde Institutional Repository Strathprints Institutional Repository Love, Jim and Ashcroft, Brian and Dourmashkin, Neil and Draper, Paul and Dunlop, Stewart and Lockyer, Cliff and Magee, Lesley and Malloy, Eleanor and Monaghan, Claire and McGregor, Peter and McNicoll, Iain and McRory, Eric and Perman, Roger and Stevens, Jim and Swales, Kim and Love, Jim (1990) The world economy [September 1990]. Quarterly Economic Commentary, 16 (1). pp. 4-7. ISSN 0306-7866 , This version is available at http://strathprints.strath.ac.uk/49867/ Strathprints is designed to allow users to access the research output of the University of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may not engage in further distribution of the material for any profitmaking activities or any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any correspondence concerning this service should be sent to Strathprints administrator: [email protected] The World Economy Although build inflationary up strongly pressures during have begun to the rate of 1990, consumer price increases fell slightly during the year and to May in both the G7 countries the OECD as a whole (5.9%). was (4.3%) The price surge which so noticeable in Japan in the latter part 1989 and early this year subsided of considerably during March and April, although there is now some evidence of a re-emergence of this below). Japan consumer seven In fact, in the problem year (see to May price inflation moderated in six of G7 countries - the exception, which the will surprise no-one, was the UK. Consumer price inflation in the year to May was as follows: Canada 4.5%; US 4.4%; Japan 2.5% (year to April); France 3.0%; West Germany 2.3%; Italy 5.7%; UK 9.7%. MACRO-ECONOMIC TRENDS The early part of 1990 saw continued economic growth countries. industrialised the in GDP the major growth in slowing industrialised the top seven nations (the G7) was just 0.5% first quarter, the same as the final of 1989. slowed year For the year to March to G7 2.4% compared with 3.3% 1989. in for the US where 3.0% growth in 1989 fell to 2.1% in the year to March. been considerably increases (4.3%) in Japan (5.5%). and remaining follows: Overall G7 growth would the growth rates not of *f calendar in it West r*-^-~==^:3*^'~ 90 - -jf'' _^y\.- have been Growth rates /£-"'"' . growth occurred had USA UK 115 - quarter GDP The most rapid slowdown lower Indices op industrial production Seasonally adjusted 0983=100) of for Germany for the G7 countries (excluding Italy) were as 1 1983 1981 1 1985 1 1987 1 1989 Canada 2.2%; France 2.5%; UK 1.8%. Industrial steadily production also continued during the first quarter of to slow this year. Labour Market For the OECD as a whole industrial production rose The by evident during 1989 have now clearly levelled off. just 1989's 2.0% rise in the year to of 2.6%. March, down As has been the from case steady Average for OECD unchanged some time, the G7 countries have led the slowdown, falls in unemployment unemployment from January. in which April The G7 were was 6.0%, countries fared and G7 industrial production growth in the year to slightly better with an unemployment rate of 5.5%, April also unchanged from January. was countries during a mere 1%. had declines in this surprisingly, countries Two of the seven industrial largest period; Canada (-2.2%) and, France performed (-0.3%). The as follows: US countries production Within individual G7 there were few changes in the rather unemployment remaining Unemployment rates stated) as follows: Canada 7.6%; 1.3%; Japan 3.4%; West Germany 2.1%; Italy 1.8%; UK 0.5%. were between (in February May unless rate and of May. otherwise US 5.3%; Japan 2.1% (April); France 9.3%; West Germany 5.1% 4 growth (April); Italy 10.2% (April); UK 6.2% a little and adding less than percentage point to the rate of inflation, the United States Gulf crisis worsens substantially. domestic During the past four months there has been fairly a barrage of conflicting statistical evidence on the performance divided of the greater threat. index US economy, with a survey-based of index of the economy. between April The index and June, in the five months of 1990 compared with the stem from same The main problem for the US may a crisis not in the Gulf but one of confidence in the domestic economy. the Japan industrial rose indicating a steadily At first sight Japan is the industrialised economy stronger which has most to lose from higher oil prices manufacturing sector, and was backed up by a 2.1% prolonged uncertainty in increase in manufacturing new orders in May. The dependent on for 99% of NAPM's remains Purchasing indicating strength of the (mainly manufacturing) sector Although growth - an increase of over 8% period last year. the An example of this is the monthly of the National Association Managers, strong first opinion on whether inflation or recession is demand is shaky, export one unless index then promptly slumped in July, once imports the Gulf. and Japan its further inflationary and potentially is oil, and recessionary again raising fears in some quarters of recession, pressure from this source would appear to be fears unwelcome for a country which recently underwent a which were strengthened by the Gulf crisis and higher oil prices in August. 'triple fall' - declines in the yen, share and Partly as a result of this type of evidence Reserve have differed somewhat over prices. Japanese contradictory the Bush administration and the bond economy resilient Federal However, in recent has proved to very prices years be the remarkably to even quite severe exogenous shocks, and this is likely to be the case once again. monetary policy. The administration has been keen to see an early cut in interest rates, arguing that the The last Commentary Federal Reserve is overly cautious with respect to depreciation inflation Japanese while being of recession. possibility too sanguine on The Reserve, on other hand, has consistently taken the view there is little real prospect of the the recession, forecasting real GNP growth of 1.5-2.0% this albeit with a very sluggish Federal rates second in will the view that a be half-growth. administration reduce the cut forthcoming, but and in only Congress agree a budget deficit, of package to which the June agreement inflation appears justified; consumer prices In the recent last record three of upwards. to such had In of months, forecasts of GNP growth adjusted in perhaps, are 1990 real GNP grew by 2.5% an never once the first over the Japanese economy had achieved the its By 44th consecutive month of growth, a feat which has been caution rapid turmoil previous quarter, an annual rate of over 10%. accomplished even in Japan since the Industrial first sight the Federal Reserve's remarkable economy has recovered and being quarter there is little sign at the time of writing. At the recent that it was as if the 'crisis' again interest the Japan's growth. occurred, been when end economic extent mentioned the yen and financial markets, sufficient, however, year Reserve Chairman Alan Greenspan has consistent to that of and on production also remains very not 1960s. buoyant, GNP growth of between 4% and 5% is now being forecast both officially and unofficially. rose 0.5% in June, giving an annual rate of increase of 5.9% The compared with 4.5% for calendar year rapidly stabilise falling in 1991, and is concerned rate reductions likely cuts taxes introduced around the 5.5% take place in in government to reduce a will further rise in the official discount 6%, before that will help the fight against to which has begun to emerge as a serious threat in Japan - interest offset although at less than 3% consumer price and higher looks budget very the rate inflation to order spending help mark The recovery in the value of the yen, coupled with 1989. administration takes the view that this deficit. low by recent UK standards. inflation Nevertheless, low unemployment (2.1%) and emerging shortages are now labour putting upward pressure the effect of higher oil on wages. Probably correctly, the administration fairly relaxed view about the effect prices will have on the US takes higher economy, a oil But trimming what of prices? Despite Japan's dependence on imports, oil is 5 now much less According important than it was in the 1970s. to one recent estimate, in 1974 a of 10% in the price of oil meant a 1.0 Although the legal and constitutional niceties rise a percentage united Germany unification must wait for occurred in practice on 2 of October, July with point rise in inflation and a 0.5 percentage point monetary union. Almost immediately, both East and reduction West experience figures in economic inflation the equivalent and a reduction in economic 0.1 percentage point. stick growth; today are nearer 0.1 percentage point in the on began being problems here is that hard data on the East German a economy is very scarce, but it does now seem to be would imply But just as it appears that Japan can the threat of higher oil prices an older for from into some time, view. Japan's experienced After trade case that the situation was much worse had been thought; already some East Germans are provide the of failing to capital to prevent a complete collapse yen there East Germany's 8,000 state-controlled companies and industry - have now been placed in the hands of does account 'treuhand' their sector. friction with the US and West which beginning of larger Japanese trade surpluses the the other with Western countries which that has entailed in the past. (trust) successful these of the whose job it transition is into to the private credits companies (valued at DM10 billion) in July, in the hope that German banks would follow close behind with own G7 growth economies. a oversee before, this may be the price which has to be paid being one of the principal - country's The trust guaranteed the first tranche of liquidity As for nearly all for Japan than the appear to be some concern that this may signal the all the pick up the profitable parts on the cheap. billion. the items of exports, of surplus $6.7 recent weakness of single One falling official statements about this being the East. of East German industry, and of being too eager to Despite of the the necessary with in problem substantially unexpected in June to cope widened effect rapid to accusing steadily of of $30 pb range this moves pains growth a catastrophe. again the Even if oil prices were degree of difficulty for Japan, but very far ones to economic adjustment, with most of the difficulties money. In fact this has been slow to their occur, with banks tending to insist on from the forced to make a personal appeal to West German bankers to trust. 100% to West guarantees Chancellor Kohl was be less cautious in their lending policies. Even if the restructuring necessary finance far from clear how much of East can survive in the free market. the view for that little half will rising to 4 million; even expect a these East German optimists unemployment to rise above 1 million, total Already was with workforce of less than 9 by Bonn, because of the of the East's industry. In July unemployment doubled to 280,000, and seems be double the estimate of 450,000 second half of the year on which budget were made. budget Germany Partly for this reason East deficit is expected to be 30% out million. unemployment is rising more quickly expected collapse to take of unemployment is industry Pessimists over survive, it German enterprises of speedy can be forthcoming rapidly, than rapid alone likely for the estimates Germany's above the forecast level of DM32 billion, and financing this With German October 'West' unification now scheduled it seems appropriate to drop from this section. for the West should, even the different economies are not so easily dealt with, and it must ultimately fall at the door of Germany. prefix Unfortunately, problems inherent in combining two very deficit 3 Germany is however, be able these problems in its stride. on these problems that this section concentrates. plans 6 for early to take Shortly before that constitutional merger were up by oil producers from both inside and outside OPEC. Nevertheless, there will inevitably be higher oil prices and a degree of pain attached to them; but unless the situation in the Gulf worsens considerably this need not be too severe. announced, the Bonn Government forecast 3.5% growth for West Germany in 1991, with almost onethird of this coming from demand stimulus from the East. While both East and West will continue to grumble about opportunism on one one side and economic incompetence on the other, the united Germany should weather the short-term storms successfully and continue to be one of the main driving forces for growth in the G7. Economies like Japan and West Germany, although heavily dependent on imports of oil, are growing sufficiently quickly to be able to weather an oil price in the $25-30 pb range without too much difficulty, although at the risk of some inflationary pressure. The US may, however, be at much greater risk. As was indicated in the United States section above, there is already a crisis of confidence with regard to the American economy which will not be helped by rising oil prices. Unlike most other industrialised countries, the US has done relatively little to reduce its dependence on oil following the price hikes of 1973 and 1979, and this may make it more vulnerable to problems in the Gulf than many other countries. PROGNOSIS Until the Iraqi invasion of Kuwait in early August it seemed that the major industrialised countries were, in the main, continuing their steady path towards economic slowdown without entering recession. Financial storms had been weathered in Japan, and while the transition to a market economy in East Germany is proving to be more costly than was anticipated, the evidence still suggested that this could be dealt with in a reasonably orderly fashion. Admittedly there was still a threat of recession in both the US and UK, but on balance the overall picture still looked bright until the end of July. Even allowing for possible US difficulties, the likely outcome for industrialised countries in the West is some discomfort but not disaster, unless the position in the Gulf worsens markedly. It is worth bearing in mind that in real terms oil halved in price between mid-1980 and mid-1990, and we have some way to go before we experience the dislocations of 1979-80. Whether the situation in the Gulf changes all this very much depends on whether there are outright hostilities and what effect there is on the price of oil. Much, but by no means all, of the shortfall in Iraqi/Kuwaiti production can be made 7