Show recovery predicted

Press, 17 November 1982, Page 44

Show recovery predicted

PA New Orleans' The United States will experience an abnormally weak recovery from the recession and its economy will grow by no more than tw.o or three per cent in 1983, a prominent Wall Street financial analyst said. Even that modest recovery could be further slowed if money supply growth is excessively restrained by the Federal Reserve Board, according to Henry Kaufman, ’managing director of the Salomon Brothers investment firm. “The initial stages of the recovery will be subnormal and at best will be half or, more likely, less than half of the typical five to 5.5 per cent of real growth experienced during the first full year of post-war business recoveries,” he told financial executives meeting in New Orleans. Kaufman, the analyst most closely watched by the United States stock and bond markets, also said the Federal Reserve should help to encourage a decline in interest rates. He said market expectations of easier money policy by the Federal Reserve Board had been largely responsible for a recent rally in the stock and bond markets. ‘ “For the time being, the task of the Fed should be to nurture these expectations and indeed to create anticipation that money rates are headed down,” he told the United States League of Savings Associations convention. He said the strict money policy followed by the Reserve Board in the past few years had been a major contributor to the high real interest rates that, had hampered economic growth.

He said consumer spending would provide what little lift the economy received next year, but would not rise as rapidly as the administration hoped because high unemployment and fears about job security would reduce public willingness, to spend money. But the consumer spending outlook was still one of the brighter spots on the economic horizon, Kaufman added. An economic recovery would get no assistance next year from business corporations because much of the United States manufacturing sector was idle and corporations would be able to increase production without building new plants, he said. His analysis, which is in line with forecasts offered by most other private analysts, suggested that the tax cuts backed by President Reagan had failed td provide the promised surge in business investment. Katifman also said that the strength of the United States dollar, which has reached record levels against several major currencies' represented a danger to world economic stability. “The great strength of the dollar today is as dangerous to global stability as the dollar weakness was in 1979,” he said. He said that the Reagan Administration’s prediction of a budget deficit of SUSIIS,OOO million in the 1983 financial year was “completely unrealistic.” He expected it to reach about $160,000 million. Kaufman’s views are

followed closely by investors. When he reversed his previ- •' ous gloomy stand on interest rates, saying he now believed they would decline, the stock market staged a rally during which the Dow Jones industrial average of leading ; shares surged by about 150 points. • He said yesterday that the -J strength of the dollar had ;v worsened the debt problems iof foreign countries, adding: “An enormous debt burden ,• has ground down economic activity, perhaps even more so than in the United States.” Kaufman calculated that defet in the non-Communist world had mushroomed to _5U514,300 billion in 1981 < from $3,60.0 billion in 1971, ■<’ representing' an of 15 per cent a year. “Critical to the resuscitation of economic growth abroad is the removal of the c immediate blockage: the huge foreign debt burden -J that has grown more rapidly and is much larger than the debt problem of the United States,” he said. !’• “In this regard, lower J; United States interest rates •. would be significantly help- ? ful.” > Kaufman suggested that confidence in the world fin- < ancial system could be bol- * stered by strengthening the - International Monetary Fund (IMF). ~ He said , this could be : achieved by raising quotas, ; the contributions from I.M.F. -2 member countries, by 50 per ; cent or more, and by setting up a very large standby ; credit.