Basu, Dipak

Buchanan, Bob

Crawford, Robert

Draper, Paul

Harrigan, Frank

Heeley, John

Jenkins, Iain

Kirwan, Frank

Love, James

McNicoll, Iain

McVey, Michael

Midwinter, Arthur

Moar, Lyle

O'Donnell, Noreen

Simpson, David

Stevens, Jim

Walker, Jim

University of Strathclyde Institutional Repository

Strathprints Institutional RepositoryKirwan, Frank and Basu, Dipak and Buchanan, Bob and Crawford, Robert and Draper, Paul and Harrigan, Frank and Heeley, John and Jenkins, Iain and Love, James and McNicoll, Iain and McVey, Michael and Midwinter, Arthur and Moar, Lyle and O'Donnell, Noreen and Simpson, David and Stevens, Jim and Walker, Jim (1984) The world economy [February 1984]. Quarterly Economic Commentary, 9 (3). pp. 3-5. ISSN 0306-7866 , This version is available at http://strathprints.strath.ac.uk/52784/Strathprints is  designed  to  allow  users  to  access  the  research  output  of  the  University  of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may  not  engage  in  further  distribution  of  the  material  for  any  profitmaking  activities  or  any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any  correspondence  concerning  this  service  should  be  sent  to  Strathprints  administrator: strathprints@strath.ac.ukThe World Economy The wor ld economy i s now domin-a t e d by t h r e e d i f f e r e n t e v e n t s : t he massive budget d e f i c i t in t he USA, t h e a g r i c u l t u r a l c r i s i s in t h e A f r i c a n c o n t i n e n t , and t h e d e b t p r o b l e m s of some of t h e developing c o u n t r i e s . The US ad-m i n i s t r a t i o n ' s b u d g e t f o r t h e coming f i s c a l year con ta ins only token measures to reduce spending in s p i t e of i n c r e a s i n g r e s e r -v a t i o n s by t h e F e d e r a l Rese rve and t h e C o u n c i l of Economic A d v i s e r s abou t t h e medium te rm i m p l i c a t i o n s of s t r u c t u r a l d e f i c i t s . F a i l u r e t o t a c k l e t h e p rob lem has e n s u r e d t h a t r e a l i n t e r e s t r a t e s remain high, wi th no downward t r e n d a p p a r e n t a s 1983 d rew t o i t s c l o s e . The d o l l a r r e m a i n s s t r o n g , u n d e r -p i n n e d by t h e s u r p l u s on t h e c a p i t a l account of the US balance of payments. OUTPUT 110 Industrial Production 1975 = 100 (Seasonally Adjusted) 1979 1980 1981 1982 198? I n d u s t r i a l p r o d u c t i o n i n c r e a s e d s h a r p l y in t h e US, Canada and Japan d u r i n g 1983, but r ema ined broadly f l a t in Europe where the s t r o n g e s t performance was r e c o r -ded by t h e UK. Not a l l European c o u n t r i e s have y e t emerged from r e c e s s i o n . I n d u s t r i a l product ion in France in t he f i n a l q u a r t e r of 1983 was below t h e l e v e l of a year p r ev ious ly , whi le French GDP ended t h e y e a r lower t han in t h e f i n a l q u a r t e r of 1 9 8 2 . In France, West Germany and Canada, r e t a i l s a l e s t u r n e d down a t t h e c lo se of 1983, marking a p o s s i b l e break i n t h e consumer spend ing s p i r a l i n i n d u s t r i a l i s e d c o u n t r i e s . W h i l e G e r m a n y ' s g rowth was r e t a r d e d by a slow r a t e of growth of expor ts during t h e f i r s t h a l f of 1983 , F r a n c e ' s recovery depends on cont inu ing to cu rb bo th i t s c u r r e n t a c c o u n t d e f i c i t and c o m p a r a t i v e l y h igh r a t e of i n f l a t i o n . Economic g rowth in t h e OECD a r e a i s e x p e c t e d t o be of t h e o r d e r of 3% d u r i n g t h e c u r r e n t y e a r , compared t o 1.7% in t h e f i r s t h a l f of 1983 and a b o u t 0.5% 3 in the second half of 1982. Within the OECD, considerable variation in 1984 growth rates is expected, ranging from 4.5% in the US, through 2.5% (on the output measure) in the UK, down to 1-2% for most of the other European economies. World trade, which grew by less than 1% during 1983, is forecast to grow by more than 4% annually over the coming two years. UK export markets, which contracted by 1.5% in 1982-3, are set to grow at 4% per annum. Markets for UK manufactures, which fell by almost 2% in 1982, with a further marginal fall last year, are forecast to expand at an annual rate of 3%. Growth at forecast rates in the rich countries will not be sufficient by itself to generate adequate living standards in many developing countries. According to the World Bank's Annual Report, if the rich countries do not solve their structural problems of high unemployment and inflation and the developing countries achieve only low growth, Hit is easy to envisage a downward global economic spiral emerging with catastrophic consequences for the developing countries.H Although Asian and oil-producing countries have not done badly in the last year, many African countries have been badly affected by drought while the typical Latin American experience remains one of mounting debt, extremely high inflation and little economic growth. A determined effort to resume the liberalisation of trade, prudent but dynamic international lending policies and more generous aid need not await the resumption of fast global economic growth; on the contrary they may be necessary to bring it about. LABOUR MARKETS The g e n e r a l e x p e r i e n c e of l a b o u r m a r k e t s i n 1 9 8 3 w a s o f a l e v e l l i n g of f i n unemployment b u t w i t h a d o w n w a r d t r e n d a p p a r e n t o n l y i n t h e US, C a n a d a , Germany and p e r h a p s t h e UK. E m p l o y m e n t c o n t i n u e d t o f a l l i n OECD Europe . On ly i n t h e US and C a n a d a d o e s e m p l o y m e n t s h o w a s u s t a i n e d upward t r e n d , and t h e n o n l y s i n c e t h e S p r i n g o f l a s t y e a r . A p p r o x i m a t e l y 50% of a d d i t i o n a l e m p l o y m e n t g e n e r a t e d i n t h e US d u r i n g t h e f i r s t s i x m o n t h s of 1 9 8 3 o c c u r r e d i n t h e s e r v i c e s e c t o r , a q u a r t e r i n m a n u f a c t u r i n g , a n d a f u r t h e r s i x t h i n c o n s t r u c t i o n . INFLATION Though t h e t r o u g h of i n f l a t i o n was p a s s e d i n m i d - 1 9 8 3 , t h e r e h a s b e e n no marked r e v i v a l i n i n f l a t i o n a r y p r e s s u r e s or e x p e c t a t i o n s . The u p t u r n i s no t c l o s e l y s y n c h r o n i s e d a m o n g s t t h e m a j o r c o u n t r i e s , u n l i k e t h e u p s w i n g of 1 9 7 1 - 7 2 . P r e s s u r e on raw m a t e r i a l p r i c e s h a s a c c o r d i n g l y n o t b e e n p a r t i c u l a r l y m a r k e d . I n d e e d , i n t h e c a s e of o i l , p r e s e n t l e v e l s of e x c e s s s u p p l y , c o m b i n e d w i t h r e c o r d e x p l o r a t i o n and d e v e l o p m e n t i n non-OPEC c o u n t r i e s and t h e a p p a r e n t d e s i r e of some OPEC members t o b o o s t o u t p u t , may d r i v e p r i c e s l o w e r i n t h e s h o r t r u n , even though o v e r a l l o i l demand may r i s e i n 1 9 8 4 - t h e f i r s t a n n u a l r i s e s i n c e 1 9 7 3 . H o u r l y e a r n i n g s h a v e 120 115 110 105 100 Total Enploynent 1975 (Seasonally Adjusted) 100 North America OECD OECD (Europe) 1979 1980 1981 1982 1983 4 Consumer Prices % 16 12 8 4 % Change over Previous 12 Mths Z-»^v^ I*-':/ ^,'\/y"""'-v • -.-•./V. \ ^ \ ^ ~ O E C D /" ' \ %"'\ (Europe) ••...  ~X.-„ North •. ..-'V "''•••••.. ..-•. " \--" America " Japan 1979 1980 1S31 1982 1983 % Long Term Interest Rates 16 12 8 4 \ ... /f\ vv""' \\ :"x!x\/ ^^ S 1979 1980 1981 1982 ,: >— ^ --V/--UK Germany 1983 acce le ra ted somewhat in recent months, but t h i s appea r s t o r e f l e c t i n c r e a s i n g use of overtime as much as any inf la t ion in b a s i c r a t e s . E a r n i n g s continue to increase more rapidly than consumer p r i c e s , thereby increasing disposable income for those in work and fue l l ing the consumption boom. PROGNOSIS As a result of structural shifts in the pattern of borrowing and lending, and in the financial framework generally,authorities in many countries have taken a more flexible view of the growth rate of particular monetary aggregates. As a result money stock in the seven major industrial countries has been allowed to grow at a faster rate than in the immediate past. The rise and fall of inflation and interest rates in recent years, compounded by rapid financial innovation, has led to increased mobility of funds between accounts with varying degrees of liquidity. Monetary authorities have accordingly adopted a more pragmatic approach to monetary targets, which has led to a comfortable supply of reserves to the banking system. Relatively higher rates of monetary growth have not however brought about any significant reductions in interest rates. There is a close link between lower interest rates and the consequent reduction of debt burdens in the developing world. The servicing of debt has not been facilitated by the protectionist measures undertaken by developed countries. Continued access to world markets by the debtor countries is essential if they are to be in a position to service their external debts and maintain an adequate level of imports. Significant falls in the worldwide level of interest rates seem unlikely during the coming year. Measures to reduce the US deficit are currently perceived by the Administration as harmful to the President's re-election prospects. This view might change if the dollar weakened significantly. However, while a concerted effort to reduce the deficit should in the long run herald a trend to lower real interest rates worldwide, the short term repurcussions of such an about-turn in American policy on world financial markets are unpredictable. In the absence of Administration action, the dollar seems likely to weaken somewhat of its own accord. Preliminary estimates of fourth quarter profits in the US showed a substantial fall on previous quarters. If last quarter's experience is repeated, the capital inflow to the US currently sustaining the dollar may slacken and the long overdue adjustment process may be set in train. 5 

The world economy [February 1984]

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The world economy [February 1984]

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