Mixed Outlook for Global Economy
Foreign trade is the wild card in the U.S. economic outlook.
Even if auto sales and housing starts stay in the doldrums, the economy will get a boost from overseas. World trade is expected to grow by at least 5% next year, after a meager 0.6% rise this year. At worst, U.S. producers should maintain their share of the pie.
However, the U.S. current account deficit will almost certainly surge. This year our international payments position improved dramatically, mainly because of contributions to pay for the Gulf War. The 1992 shortfall should be almost identical to 1990's $92.1 billion.
Gloom for Germany, Japan
The German and Japanese economies are facing the prospect of a slowdown, if not a recession. The provinces in western Germany, for example, will be hit by tax increases, high interest rates, and a reduction in stimulus from Eastern Europe.
Germans will be lucky if the gross domestic product of their western provinces rises 2% in 1992. (It jumped 4.5% in 1990 and is likely to end this year 3.1% higher still.)
Restraint May Be Needed
Japan, already teetering on the brink of a growth recession, will probably grow no more than 3% in 1992. The 1990 rise was 5.6%.
On the plus side, inflation should continue to moderate in most industrial nations. The staff of the International Monetary Fund last week predicted a 3.8% rise in consumer prices next year, after increases of 4.5% this year and 4.9% in 1990.
Nonetheless, the Federal Reserve, the Bank of Canada, and the Bank of England should be ready to restrain money growth as their economies rebound.
The IMF acknowledged in its most recent World Economic Outlook that the risk of higher inflation in these and other countries recovering from recession "appears to be small" for the time being.
However, the IMF added that "as these economies recover, the monetary authorities will need to remain vigilant and be prepared to tighten monetary conditions at an early stage, particularly if the expansion proves to be stronger than expected."
This statement is no less valid for conflicting with preelection efforts by the Bush administration to jump start the global economy. The Treasury has long been on this kick. Just last week, Under Secretary David Mulford prodded other major industrial nations to "foster an atmosphere of global growth."
Easy money would lead only to renewed inflation -- not to sustainable growth in employment and real income.
Arms Cuts Would Help
Nevertheless, there are plenty of things that governments can do to foster expansion.
IMF Managing Director Michel Camdessus maintains that cuts by industrial nations in military spending and farm subsidies would free funds for investment. "We have the potential to match several times the new funding needs," he said.
Mr. Camdessus said industrial countries could help avoid higher world interest rates by cutting arms spending, subsidies, and "prestige expenditures." He added: If countries that spent more than 4.5% of domestic output on arms were to cut outlays to this level, $140 billion a year would be saved.
"Pernicious effects" of subsidies in the industrialized countries cost another $100 billion a year, Mr. Camdessus said.
He estimated that funds to rebuild the Middle East, for German unification, and for reform in Eastern Europe and the Soviet Union would equal just 0.6% of the industrialized countries' gross domestic product.
Mr. Camdessus contended that the availability of savings to finance investment "is the central issue at the present time."
These remarks were based on a fascinating study of financing needs by the IMF staff.
The fund said such demands could average $80 billion a year for five years. But these requirements could total $100 billion a year if "more ambitious" economic reform plans are implemented in the Soviet Union and Eastern Europe.
This level of demand, the fund said, suggests an increase in real global interest rates of about five-tenths of a percentage point unless governments reduce budget deficits.
Useful Elementary Lesson
Policymakers and market participants have been concerned about a potential shortage of capital. However, the IMF offered a useful lesson in elementary economics:
New financing demands will not be "fully satisfied" if rates go up, even if only modestly.
It would not take much of an increase in real rates to ration marginal players out of the market.
The basic message of the IMF report was a breath of fresh air in a smoke-filled room: Keep money growth low and stable. Cut the public sector's demand on resources.
I hope the Beltway gang will get copies. It is good bedtime reading.
Mr. Heinemann is chief economist of New York-based Ladenburg, Thalmann & Co., a brokerage firm.
