Deflation Danger? WARNING TO WEST BY I.M.F. HEAD

Press, Volume CI, Issue 29989, 26 November 1962, Page 12

Deflation Danger? WARNING TO WEST BY I.M.F. HEAD

(BV

"LYNCEUS"

of ths "gconomut”)

(From the "Economist" Intelligence Unit)

London, October 23.—Warnings that toe immediate danger facing the economies of the free world is not inflation but deflation have become notably sharper in tone in toe last few weeks. They include, significantly, the voice of Dr. Per Jacobson, managing director of the In. ternational Monetary Fund. It was Dr. Jacobson who declared three years ago, to a then sceptical banking opinion, that world inflation was over. This did not imply that price increases were a thing of the past. Cost inflation, as everyone knows, has continued. What it did mean was that, because toe basic shortages and excessive demand that form the springs of the inflationary process had more or less disappeared, increases in costs and prices could no longer easily be absorbed and passed on. In this new situation, rising costs cause trouble of a new kind, eating into profit margins and eroding the incentive to invest. In present circumstances, therefore, the existence of cost inflation, far from being a sign that the danger of deflation is still distant, may actually increase that danger, by weakening the primary expansive force of new investment by industry and trade. Bankers Resist This conjecture of events indeed poses something of a dilemma for economic managers. The central bankers, in particular, have their eyes fixed pretty firmly on the stability of the price level; and, in countries such as Germany and Holland where they exert a clear independent influence. the central banks have been resisting pleas for more expansionary policies. Their basic test for a turn in policy is the price level. Dr. Blessing, president of the Bundesbank, has recently stated flatly that he will refuse to listen to those who advocat- a switch to official stimulation of the economy as long as price inflation con. tinues and the labour market stay, tight. And the German Government refuse® to listen, too. Its budget remains proudly balanced, and Dr. Adenauer has actually announced new restrictions on the growth of demand, including a curtailment of public building. By slamming this stable door so late in the day, as critics point out, the German authorities are removing one of the last remaining forces of continuing expansion. In the first half of this year industrial production in Germany had risen by only 1 per cent. In Hollan output had actually fallen. In Belgium the rise was fractional, and in France only 2 per cent.

Rattier better increases were shown in Britain and the United States. But the British increases of 5} per cent. <by September) looks impressive only because the measurement is from the lowest point of a mild recession; over the last year as a whole there has been very little increase in output. And no-one expects the medium-range target of 4 per cent, annual growth in national product, which is being worked on by the new National Economic Development Council, to be attained In the current year. As for the United States, the increase in industrial output there in the first nine months of this year has been 4.4 per cent, and a further increaae is expected In the last quarter. But this expansion has been a good deal slower than the Administration was hoping for, and rashly forecasting, at the beginning of the year. More serious, there is a wide unanimity of opinion that a new down-turn will come in 1963. This would be especially tor two reasons. First, it would mark yet a further narrowing in the Interval between recessions, and would undoubtedly be taken aa a sign of incipient weakness In the American economy over the long term. It could thereby touch off secondary reactions in weakening still further the propensity to invest. The other major danger about an American recession in 1963 is that this time it could coincide with a European one. Signa Of Reeeariaaf The most important reason why the world at large has shaken off America’s previous post-war recessions is that they have coincided with periods of strong expansion in Europe. But now Mr Marjokn, d’lputy chairman of the European Commision of the Common Market and a dis-

tinguished economist in his own right, has publicly voiced his fears that expansion may end or even give way to decline. He is worried by difficulties in particular sectors such as steel and chemicals. about the fall in commodity prices, about reduced profit margins and the effect on investment. In consequence almost the only driving force behind European expansion is domestic con. sumption, which may not be self-sustaining. What is to be done? Dr. Per Jacobson, addressing a meeting of Washington women, was notably more forthright than when he addressed the assembled gathering of world bankers and finance ministers at the I.M.F. conference a month before. He now advocates coordinated action by leading western industrial countries in order to bring about more pronounced expansionary policies in toe budget and monetary spheres. Fortunately, there is a ready-made occasion at hand for such a co-ordinated effort at reflation: top western economic and currency managers meet in November in Paris at the Organisation for Economic Co-operation and Develop, ment. Britain’s representatives will certainly give firm backing to Dr. Jacobson’s call; and so should America's. Will their pressure be sufficient to overcome the doubts and qualms of toe Continent’s conservative bankers?