Concern over global recovery

Press, 14 December 1983, Page 42

Concern over global recovery

PA Washington Leading American bankers and economists have expressed concern that high U.S. interest rates spawned by record federal budget deficits could limit the scope of a global economic recovery. The Bank of America chief economist, John Wilson unveiling the bank’s annual world economic outlook, told reporters that although the United States could expect robust growth of 5.6 per cent in 1984, Western European countries were likely to see a much smaller expansion of only 2.1 per cent. Mr Wilson projected a 4.4 per cent 1984 growth rate for Japan and for Asia as a whole, a one per cent growth rate for Latin America, and a 3.7 per cent expansion for the world economy. “But the number one danger in the economic outlook is the U.S. budget deficit and what it means for continued high interest rates and the exchange value of the dollar,” he said.

Mr Wilson added taht the high U.S. interest rates were attracting needed investment capital away from European economies. He predicted a slight rise in short-term interest rates from their current 10.5 per

cent level in the latter half of 1984. Albert Wojnilower, chief economist for First Boston Corp., predicted gradually rising interest rates, which he said would not affect the U.S. recovery at this stage. “But the rates are not irrelevant on the external side, for the rest of the world, they are enormously and crushingly high,” he told a group of U.S. financial executives.

Both Mr Wojnilower and Mr Wilson predicted increases in U.S. inflation for next year, attributing the rise in part to the strength of the American economic recovery.

Mr Wilson projected a U.S. inflation rate average of five per cent in 1984, up from an expected rate of 4.3 per cent this year. He pegged the global inflation rate at 11.5 per cent for ■1984.

■ The two bank economists also predicted that the U.S. dollar would remain strong against other currencies. Wilson said he expected the dollar to drop only five to 10 per cent against the Japanese yen and the West German mark by the end of 1984. Chase Manhattan Bank’s chairman, Willard Butcher, in an address to a separate business group, also cited

U.S. budget deficits as a major cause of high interest rates and an overvalued dollar. He urged spending cuts to reduce deficits. Mr Wilson said the world economy would have to grow by at least three per cent a year between 1984 and 1990 to keep the international debt problem in check. He said even with such a growth rate, the total foreign debt burden for major Latin American borrowers would rise from 5U5600 billion in 1984 to SUS9OO billion by 1990. . The Bank of America forecast projects an economic growth rate of 1.5 per cent for Mexico next year, and five per cent for Argentina. According to the forecast, growth in Brazil will decline by 0.8 per cent after a 2.0 per cent drop this year, while growth in Venezuela will drop 0.4 per cent after a 1.1 per cent decline in 1983.

Citicorp’s senior Vice President, William Rhodes, speaking to a group of business executives said he was optimistic that the Mexican economy would improve rapidly in the next two years.

But Mr Rhodes, the leading U.S. banking expert on Latin American debt, said it would take longer for Brazil to return to economic health. Meanwhile in London the Secretary of the U.S. Treasury (Donald Regan) said that American interest rates were likely to remain at their present high levels at least until early next year.

Mr Regan also said it was very unlikely that the Federal Reserve Board would significantly loosen its monetary policy if the U.S. economy continued its expected strong rate of recovery during the early part of 1984.

The Secretary was speaking at a news conference held for correspondents of British newspapers, from which news agencies were excluded. His remarks were reported by the “Financial Times.”

Mr Regan said that if the U.S. economy was strong in the early part of 1984, interest rates would not be likely to fall.

The administration did not want to “repeat the mistake of 1980/81” and risk overheating the economy by a premature relaxation, of monetary policy,” he said. Mr Regan said the budget deficits expected in future years were much too high, and there was no way the administration could toler-

ate such large deficits. Mr Regan said he would like to halve deficits to about 2.5 per cent of national output, instead of the five per cent projected for 1986.

He emphasised the difficulties of taking strong measures to curb spending during the Presidential election campaign next year. Asked what action would be taken to curb deficits, he said: “Let us get re-elected first.”

Mr Regan said the United States had to get to grips with the prospect of heavy defence spending, “and whether we are going to tax ourselves for them.”

For this year and next, he was confident that the administration would be able to finance the large deficits expected, but there were doubts whether thiS would continue to be possible in later years.