Global Economic Outlook Masks Need to Plan for Stimulus
IT is now official: 1993 will be another year of serious underperformance in the major economies of the industrial world. This weekend finance ministers and central bankers will gather in Washington at the IMF/World Bank Annual Meeting to discuss the world economic outlook, accompanied by thousands of bankers ready to join in the debate.
A year ago, the official forecasters estimated that growth in the Organization for Economic and Cooperation Development countries during 1993 would be a very respectable 2.9 percent. But the reality is that output will expand by little more than 1 percent. Even so, the same forecasters have not completely lost their buoyant spirits and now confidently predict that 1994 will be a better year, with growth picking up to 2.2 percent. The United States is expected to be the strongest of the major countries, growing by 2.6 percent, while the EC is forecast to bounce back, particularly in Germany as interest rates decline. The biggest worry for the forecasters is Japan, where output fell in the second quarter. But even here, 1994 is thought likely to be back on track with positive growth.
The brightest spot in the world economy by far is the developing world. The developing world as a whole is expected to grow by 6 percent in 1993, more than four times faster than the industrial world.
This means that for the second year in succession the absolute dollar increase in the combined gross domestic product of this part of the world will be considerably greater than that of North America, the EC, and Japan put together. Developing countries have become a ``mini-locomotive'' for the industrial world, and this is expected to continue in 1994.
Unfortunately, not only in 1993, but during the last several years, economists have been far too optimistic about growth. Not long ago it was popular to argue that the US recession would be short and shallow; many economists held that the EC and Japan would escape recession altogether. These proved to be wrong.
The biggest error has been in forecasting consumption, which in part reflects the sluggishness in the growth of employment. Also, officials have been slow to recognize that many government policies, while of long-term benefit, have negative short-term impact on growth. For example, the new emphasis on budget cutting, which started in the US but spread to Europe, will not help growth in 1993 or 1994. Similarly, the governments of Europe went out of their way to manufacture a recession through their commitment to the Exchange Rate Mechanism, which led to very high interest rates maintained for far too long.
Japan's growth has been badly affected by the rise in the value of the yen. The Japanese economy is the second largest in the world, and while the yen has stabilized in recent weeks, it is still very high and is badly undermining corporate profits and employment prospects.
On the other hand, Japan is the only industrial country of any size that has close to a balanced budget, which allows it some freedom in fiscal policy. Even so, the Ministry of Finance remains reluctant to see the budget slide very far into deficit, which is why few observers have any faith that the government's new $5 billion stimulus package will have much of an effect on the economy. Equally, a cut in the discount rate from 2.5 percent to 1.75 percent announced on Tuesday is unlikely to make much of a difference.
Against this background, it is reasonable to suggest that the official picture painted for 1994 for the major industrial countries is once again too rosy. There is a good chance that growth will be flat in Japan for the next several quarters. In Germany, with labor costs 50 percent higher than in the United States and with job security weakening as corporations downsize, a pickup in growth could be easily derailed. This phenomenon of job cutting is spreading across Europe just as it has in the US, Britain, and other English-speaking nations, and is likely to adversely affect consumption. Most economists feel that growth in the US is unlikely to be much above 2 percent, hardly a locomotive for the world economy.
The good news is if industrial growth turns out to be 2 percent or less for the fourth year in a row, we would see still lower interest rates, especially in Europe, and less inflation. But, while these conditions reduce borrowing costs, they also increase the vulnerability of corporate profits, leaving them more suspectible to shocks, which are by their very nature unpredictable. The scale of problems and shrinking of industrial giants like IBM and others were unthinkable five years ago. Yet more corporations could go the same way in Germany and Japan as competition intensifies from all quarters of the globe. Commodity prices would remain under pressure and an actual collapse in some prices could not be ruled out.
The biggest risk is that the tilt in the world economy is downward with problems in the industrialized nations compounding each other and, sooner or later, eroding growth in the developing world. This is why it would be wrong for finance ministers and central bankers in Washington next week to accept the easy assumption that 1994 will be a noticeably better year than 1993. Rather, this is the time to start contingency planning about how to jump-start government spending if growth falls short again in the year ahead. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHELCSPS.COM.