Cautious forecast of better times

Press, 31 December 1982, Page 16

Cautious forecast of better times

From ‘The Economist,’ London

Scrooge, rejoice: 1982 has been your year. Recovery never came. Unemployment grew. All governments turned a bit more protectionist. Argentina. Mexico and Brazil followed Poland to defaulters' door, raising fears that the world's banking houses might collapse beneath a pile of IOUs. Such fears hold the key to 1983 and beyond. Not for 50 'years has the dismal science of psychology had such harmful effects on economics to the point where mildly encouraging economic news can be overwhelmed by unquantifiable. intangible but unmistakable gloom.

Enter 1983, with a real if insubstantial smile. A look at the economic blackboard suggests there are three main reasons why the new year need not be as awful as 1982.

First, some kind of recovery beckons. Second, oil prices are falling. And. third, exchange rates are at last moving in directions that could call off threats of a trade war between the United States, Japan and Western Europe.

None of these will make 1983 an easy year. Together, though, they could stop governments, businessmen and bankers from psyfching themselves into a real depression — provided they are willing to get off the couch. A year ago, the rich countries’ club, the Organisation for Economic Co-operation and Development (0.E.C.D.) of

which New Zealand is a member, forecast that the gross national products of its 24 members would rise by DA per cent in 1982. In its latest report the O.E.C.D. reckons that G.N.P. has probably fallen by l 2 per cent in 1982. In consequence. almost 32M people are now unemployed in the O.E.C.D. countries — 34>M more than seemed likely a year ago. Undaunted the O.E.C.D. predicts that recovery will happen in 1983 instead. On purely economic grounds, this incautious optimism seems justified. Real monetary growth has been strong during the past year, and this has always previously triggered real growth in output. Nor need the recovery be short-lived. Money supplies have been growing in real terms, not just because central banks have opted to pump enough money into their economies to keep ahead of inflation for a while. That may have happened in the past few months, but the main and encouraging cause of real monetary growth during 1982 has been the slowdown in inflation. A year ago the O.E.C.D. was forecasting that the broadest measure of inflation would rise by 8% per cent in 1982, after 8.9 per cent in 1981. Instead, the rise in 1982 looks like being only 7 V 2 per cent and each cut in it brings nearer the day when some low rate of monetary growth can boost real demand without risking un-

other boost to inflation. Hence the importance of the splendid split in O.P.E.C. and of the falling price of oil. Every time it slips, oil consumers should give a cheer, provided their governments are brave enough to keep hammering nails into O.P.E.C.'s coffin. To keep up the conservationist pressure. governments should raise indirect taxes on energy to offset the fall in crude oil prices. To reap the full economic benefits they should use the extra revenue to cut other kinds of indirect taxes. That would shave the inflation rate, and therefore help to reflate demand. Glad tidings, surely? Not according to nervous bankers, agitated that cheaper oil will make it harder for their overborrowed customers to repay their debts. Rhubarb. The only oil exporter that has borroweii on a break-the-banks scale is Mexico and even its debt is dwarfed by that of the countries which a fall in oil prices could save from breaking those self-same banks. Sensible action by governments should prevent one rogue debtor panicking the herd: Mexico’s debt would anyway become more manageable if economies recovered, because Mexico could pump more oil. It is not a member of O.P.E.C. so can ignore the shaky production ceiling agreed on this month. By cutting its price. Mexico could boost its sales -- though this tactic would fail if all other oil producers tried it.

As falling oil prices pull inflation down — and thus hasten the start of recovery — the smoothness of the world's economic comeback will partly depend on how exchange rates move. For almost two years, their movements guaranteed trade rows: the dollar and sterling became more overvalued. the yen and the D-mark increasingly' cheap. Now that the swing back has started, international trade will threaten fewer jobs in the United States and Britain, while it will help to boost demand in the two countries with the lowest inflation rates. Japan and West Germany. That is the good news from the economists' blackboard. It leads the O.E.C.D. to expect G.N.P. growth of l L z per cent in 1983. while inflation continues to edge down — to perhaps G per cent in 1983. It could happen that wav. Past experience suggests that it should happen that way. Yet psychology may make a. monkey of the economic models.

Bankers may be so paralysed by the fear of default that they refuse to risk lending the extra $5 billion which could prevent it. Financial markets may remain so petrified of another inflationary surge that they refuse to bring long-term interest rates down.

Companies may not believe that recovery will come, and — by seeking refuge instead in protection from foreign imports — make sure that it doesn't. And. as nerves shatter, funk and not-sd-funk money

could head into dollars worsening the American currency's overvaluation and hence bringing closer a real trade war. The world is balanced on a ledge. On one side lies gradual recovery, on the other a chasm that it could talk itself into. Its balance is probably more precarious than most governments realise, and it might slip the wrong way sooner than they think possible. Because the wrong move could come more from pyschology than from economics the way policies are handled will matter more than their details. Confidence will not return until governments can display an ability to act quickly and a readiness to see (and to demonstrate) how each piece of the jigsaw fits into the wider whole.

Slump prevention should therefore start by giving a bigger role to the international institutions. The General Agreement on Tariffs and Trade needs support for a new

round of trade liberalisation. The International Monetary Fund and the World Bank, which in dozens of countries have become as important to economic management as the national treasury, need more cash to sweeten their oftenunpalatable medicine. And they need to work more closely with the Bank for International Settlements, which has developed an effective transfusion service that some patients now risk confusing with a convalescent ward.

None of these bodies was designed to deal with the kind of dangers that threaten the world this New Year. All have adapted, however. Better that they go on adapting than that politicians should waste time drawing up some new blueprint for world order.

And far. far better to put faith in internaiional bodies than in go-it-alone nationalism. Avoid that temptation and 1983 might even be a happy new vear.