ECONOMIC INTELLIGENCE WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500150027-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: September 29, 2009
• Sequence Number: 27
• Publication Date: June 19, 1974
• Content Type: REPORT

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25X1
Secret
Economic Intelligence Weekly
Secret
CIA No. 8130/74
19 June 1974
Copy N2 372
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Secret
USSR: Hard Currency Surplus in Store Soviets gain strength in
international economic negotiations. I
India: Another Critical Monsoon at Hand Grain situation continues as tight
as in 1973. 2
Giscard Adopts Deflationary Policies French economy probably will fall
short of new economic goals. 3
Monetary Discussions Close Without Major Agreement Participants fail to
agree on monetary reform or on recycling of oil funds. 4
Economic Implications of Indian Nuclear Program Costs are small in
relation to other expenditures. 5
Syria: Economic As, assment of Returned Territory Small Golan area is
economic liability. 6
OECD: Somber Economic Prospects Depressed real growth, soaring
inflation, and mounting current account deficits dominate outlook. 8
Page
CEPAA Grapples with Raw Materiai Problems
10
10
10
10
Joint Copper-Bauxite Action?
Summaries of Recent Publications 11
Comparative Indicators
Recent Data Concerning Internal and External
Economic Activities Al
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Secret
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Secret
ECONOMIC INTELLIGENCE WEEKLY
Articles
USSR: HARD CURRENCY SURPLUS IN STORE
Unprecedented hard currency surpluses in prospect for 1974-75 will greatly
strengthen the Soviet position in international economic negotiations. Barring major
shifts in trade policy or bad harvests, the USSR is expected to earn annual surpluses
of at least one billion dollars in its hard currency balance of payments, following
more than a decade of deficits. Rising prices for Soviet oil, millerals, and other
raw materials, combined with a sharp fall in grain purchases after last fall's record
harvest, account for the turnaround.
Soviet Hard Currency Balance of Payments
Projected
1972
1973
1974
Current account
Credit
....
Debit
1,420
Credit
Debit
1,876
Credit
506
Debit
Merchandise trade
2,815
4,171
4,817
6,566
6,200
5,600
Transportation (net)
....
....
....
50
35
....
Travel
120
25
147
28
162
32
Interest repayments
....
124
....
157
....
220
Dividends
10
....
10
....
15
....
Transfer payments
....
45
....
49
....
54
Capital account
580
....
11,021
....
540
....
Medium-term and
long-term credits
1,030
438
1,690
657
1,410
858
Compensation payments
....
12
....
12
....
12
Gold sales
300
....
950
....
N.A.
Change in hard currency
assets 1
540
....
....
95
....
1,045
1. Includes errors and omissions, short-term capital movements, and hard currency repayments from less
devclop.-d countries on Soviet credits.
Using its monopoly control of trade, Moscow might consider speeding up
imports from the West as a result of its improved cash position. But a large upsurge
in imports is unlikely in the next year or two because of the difficulties in adjusting
plans and the long leadtimes needed for major investment projects. The leadership
has more immediate 'Nays to take advantage of its position; it:
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? will not have to accept unsubsidized loans at high interest and will
bargain hard on all contract terms;
w will pay cash for more of its current purchases;
? may postpone exports of some commodities - diamonds, for
example - for which world demand is growing steadily; and
? will have the option of reducing or even halting gold sales.
Even with any plausible combination of measures to increase imports and
limit exports, Soviet authorities almost certainly will have to deal with a sizable
surplus in the hard currency balance of payments in 1974, and probably in 1975
as well. Historically, they have not held large hard currency reserves, fearing
devaluations. Rapid inflation in the West probably has increased this reluctance.
Nonetheless, the only reasonable option available to the Soviet foreign trade
managers is to place these surpluses in their own banks in the West or in other
Western banks. More important, the new-found liquidity should encourage Soviet
planners to count more heavily on Western machinery in framing the capital
construction programs in the 1976-80 Plan.
India enters the June-September monsoon period with its grain situation as
tight as in 1973, when supplies were stretched thin until the November harvest.
Government stocks -- used for subsidized sales, largely in urban and industrial
areas -- are at best no higher than the exceptionally low stocks of a year ago.
Domestic grain procurement between now and the fall harvest probably will fall
below the 1973 rate. Grain imports, however, are expected to reach 5 million
tons, compared with 4 million in 1973.
Early stages of the monsoon have arrived on schedule in the southwestern
and northeastern comers of India, but meaningful assessments of the fall harvest
will not be possible until late summer. The summer monsoon normally provides
three-fourths of annual rainfall; a similar proportion of agricultural output -
including two-thirds of all foodgrains -- is grown during this period. Fertilizer
supplies, far less important than weather in determining production, again are
expected to grow slightly, still falling short of demand. A normal monsoon would
enable India to avoid boosting grain imports in 1975. But a monsoon failure would
prompt New Delhi to seek sizable grain imports on concessional terms.
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GISCARD ADOPTS DEFLATIONARY POLICIES
The deflationary economic program announced by Paris last week aims to
cut the inflation rate to 6% by mid-1975 and to eliminate the trade deficit by
yearend 1975. At the same time, the government is promising to maintain growth
and full employment. We expect the French to fall short of all these goals.
Fiscal and Monetary Measures
Tighter fiscal policy will play a key role in reducing the rise in consumer
prices, now running at an annual rate of 18% to 20%. During the second half
of this year, an 18% tax surcharge on corporate profits and reduced depreciation
allowances will draw an additional $1.2 billion into the Treasury. Individual incomes
will be subject to varying surcharges up to 15% for an additional yield of
$500 million. Giscard also promised expenditure cuts totaling $200 million. All
told, the government will siphon about $2 billion out of the economy, equal to
2% of GNP for the six-month period. Only part of the additional tax revenue
will be used to finance new social measures, to be announced this week.
On the monetary side, the existing limit on credit expansion - 13% for any
12-month period - is to be more strictly enforced. To encourage savings, interest
rates will be boosted by two percentage points; an increase in lending rates also
is expected. The existing price control program is to be tightened, with a special
tax threatened for firms that raise prices "excessively." Business will be pressured
more than ever to hold down wage i;icreases. Together with high-income groups,
business will bear the brunt of new austerity measures.
By so dampening domestic demand, Paris hopes to force French industry to
divert production to filling export orders. Many producers are operating at peak
capacity, and the number reporting severe labor shortages has hit a post-war high.
In a direct move to improve the trade balance, the Giscard government also intends
to cut oil imports by 10% by raising product prices about 5%, rationing heating
oil, and instituting other conservation measures.
Giscard's previous inclination toward deflationary measures undoubtedly was
reinforced by his recent meeting with Chancellor Schmidt and by the increase in
the trade deficit in May. German officials have been advocating stricter coordination
of policy in the EC, which to them means adoption of tighter fiscal and monetary
policies by other members. They have made it clear that such policies are a
prerequisite for German financial assistance. Aid from Bonn is not now an important
consideration to Paris but could become so if the trade picture continues to
deteriorate. The French had been expecting trade deficits of about $300 million
monthly during 1974 because of higher oil prices. Rapidly growing imports of
manufactured items - particularly capital goods - pushed the deficit to $400
million in April and well over $600 million in May.
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Prospects
The anti-inflation and trade goals set by Giscard will be difficult if not
impossible to achieve. Cutting inflation to a third of its current rate within one
year is unlikely even if prices of imported raw materials drop substantially. Wages
will be the principal problem, as the unions - already anti-Giscard - continue to
press for record-breaking increases.
Restoring foreign payments equilibrium by the end of 1975 may prove to
be even more elusive. The OECD recently projected a trade deficit of $4.4 billion
and a current account deficit of $6.5 billion for France in 1974. The higher
corporate taxes should reduce domestic demand for capital goods, thereby cutting
imports of capital goods while freeing some for export. New conservation measures
should also reduce oil imports, although probably not to the extent hoped for
by Paris. On the other hand, imports of industrial raw materials and consumer
goods are likely to increase moderately. Moreover, France's ability to boost export
earnings substantially will depend on demand by major foreign customers, several
of which face industrial slowdowns and severe trade deficits.
As for the goal of maintaining full employment, export industries will hardly
be able to pick up the expected slack elsewhere in the economy. Domestic demand
will be doubly hit as the new cutbacks in government and private expenditures
will be added to cutbacks arising from higher oil costs.
MONETARY DISCUSSIONS CLOSE WITHOUT MAJOR AGREEMENT
No major agreements on international monetary reform or on the recycling
of oil funds were reached at last week's financial meetings. These included sessions
of the IMF Committee of Twenty (C-20), the Group of Ten (major financial powers,
G-10), and the Bank for International Settlements (BIS). Participants again pledged
not to pursue beggar-thy-neighbor policies in dealing with the impact of higher
oil prices. They failed, however, to develop arrang' ments that would allow each
consuming country to finance its higher oil import bill for a sufficient period to
permit smooth current account adjustment.
As expected, the C-20 failed to develop an outline for basic international
monetary reform. Uncertainties arising from sharply increases oil prices precluded
agreement, despite nearly two years of negotiations. The C-20 merely adopted a
number of interim reform measures that will not substantially alter existing
practices.
? New guidelines for the management of floating exchange rates are
so general that members will continue to be free to pursue their
own currency intervention goals.
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? A new IMF lending facility does not command sufficient funds to
bail out countries with oil-related payments problems.
The G-10 agreed to allow gold to be used as collateral at negotiated prices
in official borrowings. This measure offers only partial and temporary relief to
developed countries in major payments difficulties and does nothing for LDCs.
Central bankers at the monthly BIS meeting in Basel discussed a number of
pressing problems: the recycling of oil funds to consuming countr?-.s, central bank
use of monetary gold reserves, and Italy's financial plight. They were unable to
reach any consensus. They again discussed plans to aid Eurocurrency banks in the
event of a financial crisis but did not come up with any operational proposals.
Italy's government crisis and the premature departure of Italian Central Bank
Governor Carli prevented the bankers from arriving at concrete plans to help Rome
finance its payments deficit. The mood of the meeting was very somber.
The economic burden of India's nuclear program has been minor. The
explosion on 18 May was the culmination of a reported five-year program that
cost $216 million. In this same period, India also spent more than $400 million
on other nuclear programs, predominantly power research and facilities. India has
two nuclear power stations in operation and is building a third. The entire nuclear
program represented only 2.8% of the $22.4 billion public sector development
expenditure during the last five years.
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SYRIA: ECONOMIC ASSESSMENT OF RETURNED TERRITORY
As a result of the recent disengagement, Syrian refugees apparently will be
permitted to resettle a thin strip of the Golan area including the city of
Al Qunaytirah. Although politically valuable to Damascus, this territory is an
economic liability.
The city of A] Qunaytirah formerly served as the main marketing center for
the province that embraced all of the Golan Heights. Prior to the June 1967 war,
this province, which accounted for 1% of the land area, produced 17% of Syria's
millet, 12% of its fodder crops, 6% of its fruit, and 3% of its vegetables. Nearly
all of the productive agricultural area remains in Israeli hands under the present
disengagement.
Rebuilding the city not only will be a costly project but also will entail
subsidies for the inhabitants, who may approximate the 1966 total of 25,000.
Expenditure on housing alone could cost $20 million, or about one-fifth of the
amount mentioned as possible US assistance to Syria. Supporting facilities, such
as water treatment and electric powerplants, shops, and administrative buildings,
conceivably could cost twice the housing outlay. Although reconstruction activities
will employ some local labor, thousands will remain jobless. The city, in essence,
would become a huge refugee camp requiring continued support from Damascus.
The bleak economic outlook for the recovered Golan segment reinforces the
Syrian view that disengagement must be treated as only a first step toward eventual
return of all the Golan Heights.
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The Israeli-Syrian Disengagement Lines
Predominant Land Use 1967
Grazing
Orchard
Line A Isrull lIs4o1girnsnt line
Line A-1 Isradl;Eivilians only
line A $yrlsa dllun,gemsnt line
WINTER VEGETABLES
WHEAT
'FAQ
BANANAS- L?f
CITPUS,
/ CITRIJ,
IS,
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OECD: SOMBER ECONOMIC PROSPECTS
Depressed growth, soaring inflation, and mounting current account deficits
will dominate the economic outlook for the developed countries over the next
12 months. New OECD forecasts - which continue to point to a mild economic
recovery in the second half of 1974 accelerating somewhat in the first half of
1975 - appear overly optimistic as long as countries continue to pursue restrictive
economic policies to deal with inflation.
The OECD projections, presented by the Secretariat at a 10-11 June meeting,
envision more rapid growth and less inflation in most countries than indicated
in the forecasts prepared in January and May. The Secretariat expects economic
performance in OECD countries in the first half of 1974 to be a little better than
previously forecast. Only Italy's growth rate has been revised substantially
downward - from 3.6% to 2.0%. Real GNP is still expected to decline in the
United States, Japan, and the United Kingdom in the first half of 1974 and increase
only moderately in all other major developed countries.
Developed Countries: Economic Projections
1973
Total 19741
1st Half 19741
2d Half 19741
Jan
May2
Jun
Jan
May2 Jun
Jan May2
Jua
Real GNP Growth (Percent Change
from Previous Period)
United States
5.9
0
4.7
-0.5
-1.8
-2.7
-2.9
1.5
1.4
3.0
Canada
7.1
4.3
4.7
4.7
4.0
4.3
4.7
5.0
4.3
4.5
Japan
10.6
1.8
1.1
1.5
-0.5
-2.3
-2.0
5.5
5.5
5.5
France
6.1
4.3
4.5
4.5
4.0
4.4
4.5
3.3
3.8
3.7
West Germany
5.3
0.8
2.1
2.5
1.0
2.5
3.3
2.3
3.1
3.5
Italy
5.4
5.0
4.8
4.0
3.0
3.6
2.0
4.0
2.6
3.0
United Kingdom
5.4
-2.5
-2.5
-1.5
-11.0
.8.7
-6.1
12.5
8.3
6.0
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Stronger overall economic performance is expected by OECD in the second
half of 1974. Real GNP growth forecasts have been raised for Canada, West
Germany, and Italy. Current projected real GNP growth for the United States is
now twice as high as the original January estimates. Only Brit in's economic growth
is expected to fall well below May's estimates.
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Developed Countries: Economic Projections
Current Account Balance
(Billion US $)
United States
3.0
-4.0
-1.0
-2.5
0.4
-1.5
-1.4
Canada
-0.3
0
-0.7
0
-0.2
0
-0.5
Japan
-0.1
-7.5
-7.5
-4.0
-4.1
-3.5
-3.4
France
-0.2
-3.5
-6.5
-2.0
-3.3
-1.5
-3.2
West Germany
4.7
-1.0
5.5
0
4.0
-1.0
1.5
Italy
-2.5
-5.5
-7.5
-3.0
-4.3
-2.5
-3.3
United Kingdom
-3.7
-8.0
-11.0
-4.5
-5.6
-3.5
-5.4
GNP Deflator (Percent Change
from Previous Period)
United States
5.4
7.8
9.0
Canada
7.1
8.0
9.0
Japan
12.1
16.5
22.5
France
7.0
12.0
11.0
West Germany
6.0
7.0
7.3
Italy
10.5
11.0
14.3
United Kingdom
9.0
10.5
8.0
The new OECD forecasts assume that expansionary economic policies will
be introduced this summer in France, West Germany, and Japan as inflationary
pressures begin to case and domestic unemployment rises. It is far from certain.
however, that current restrictive economic policies will soon be abandoned. The
governments generally face unacceptable rates of inflation and worrisome tr; de
deficits. Moreover, unemployment rates remain comparatively low in most instances.
The Japanese OECD delegation stressed that Tokyo would neither relax its
monetary policy nor increase government investment in the near future. The
delegation estimated that real GNP would consequently decline by 1.5`%% this year
rather than increase as the Secretariat had projected. Italian and French
representatives also argued that the OECD assumptions were overly optimistic.
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CEMA Grapples with Raw Material Problems
connecting the USSR with Eastern Europe.
Soviet raw material prices and deliveries in 1976-80 are expected to be the
major topic of discussion at the 28th CEMA Session, which opened yesterday in
Sofia. The East Europeans are worried about the consequences of paying more
and getting less than desired from their principal supplier. Eastern Europe is
forced to buy a larger share of its industrial raw materials in the West, imports
of Western machinery will suffer. The session will also take up revision of
intra-CEMA currency exchange rates, the status of plan coordination, and
multilateral projects such as a natural gas pipeline and an electric power line
Joint Copper-Bauxite Action?
4t the upcoming meeting of the Intergovernmental Council of Copper
Exporting Countries (CIPEC) in Lusaka, Peru probably will propose that copper
exporting nations coordinate their actions with those of the Intergovernmental
Bauxite Association. Because aluminum is a substitute for copper, joint action
would make it easier to establish and maintain a minimum price for copper. We
doubt that the copper producers will agree to fix a mininnnn price at this time
or that the bauxite producers would take concerted action with CIPEC. In the
past, for example, CiPEC has failed to establish a minimum price because of the
unwillingness of members to sacrifice immediate
withholding copper from the market.
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Publications of Interest
China: Modernization of International TelecommunicaIionc
(ER IR 74-14, June 1974,
China is pressing a vigorous program for the modernization of its international
telccom-nupleations. Since 1972, three standard Intelsat ground stations have been
placed ill operation, construction of a high-capacity cable route linking Canton
and 1-long Kong has been completed, and work is starting on a submarine cable
connection between China and Japan. In addition, major improvements are being
made in the quality of existing radio telephone circuits and international switching
capability. The modernization program has provided an exponential increase in
international high-grade telephone and telegraph channels whicl, will enable China
to handle th' sharp growth in traffic anticipated in the remainder of the decade.
Petroleum Developments in Sub-Saharan Africa
(ER RP 74-12, June 1974,
This publication surveys exploration, production, and export of oil in
sub-Saharan Africa. Recent price hikes and interruptions in supply have
reinvigorated the search for oil in the region. Almost every sub-Saharan Country
has lot exploration concessions to international oil companies, which are attracted
by the high quality of the oil and the proximity to North American and West
European markets. The potential produ.ing countries have noted Nigeria's sizable
earnings from oil exports. Even small amounts of oil could relieve the
balance-of-payments drain caused by expensive oil imports.
Western Investment in Eastern Europe: Reluctance on Both Sides
(ER IM 74-8, June 1974
Large-scale Western in.,.stment in Eastern Europe appears unlikely. Only
Yugoslavia and Romania are actively seeking foreign investments. Bulgaria.
Czechoslovakia, and East Germany prohibit equity ventures while Poland continues
to equivocate on the issue. I-lungary, although permitting equity ventures for the
past four years, granted tentative approval to its first project only this month.
Even in the countries that permit equity ventures, Western investors are often
deterred by the frustrating negotiating process, the limited profit possibilities, and
the requirement that much of the product be exported.
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INTERNAL ECONOMIC INDICATORS
GNP'
WHOLESALE PRICES
Cnnslanl Markel Prices Avuragu Annual IntlusItial Average Annual
Growth Ilnle Sou! Growth Rall Since
I'nrcunt Ci,angu Percent Change ""
Latest II II III Pluviolls I Year Ihevlnus Latusl beat PiLvious I Year 3 Mouths
Quarter Quarter I!Nll Earlier auarlet Munch Month 19111 f arller (arller
United Status
74 I
-1.0
0.2
-0.3 United States
May 74
2.7
8.4
20.1
40.0
Japan
741
-5.0
-2.4
-18.6 Japan
May 74
0.7
11.1
35,3
8.4
West Germany
73 IV
0.1
3.4
- 0.3 West Germany
Mar 74
1.0
0.8
13.1
30.3
Franca
73 IV
1.8
5.7
7.3 France
Apr 74
2.4
12.8
34,0
45.3
United Kingdom
73 IV
-0.4
3.9
-1.4 United Kingdom
Apr 74
2.1
11.2
25.8
54.5
Italy
72 I
0.8
5.2
3.4 Italy
Jon 74
7.1
11.8
33.9
00.3
Canada
741
1.7
3.0
7.0 Canada
Mar 74
2.0
10.4
20.7
39.1
Aver+ga Annual
Gruwli Rate Since
Average Annual
Growth Hale Since
Percent Changli
Latest haul Previous I Year 3 Months
'tonth Mouth 19711 Earlier Earlier"
Percent Change
Latest ham Previous I Year 3 Months
Munch Month 19111 Earlier tar her
United States
May 74 I
0.4
4.6
0.4
-0.5
United States
Apr 74
0.0
5.8
10.3
12.9
Japan
Apr 74
-1.7
6.9
2.7
-9.9
Japan
Apr 74
2.7
11.4
24.9
30.8
West Germany
Apr 74
0
3.2
1.1
-2.9
'test Germany
Apr 74
0.6
6.3
7.1
7.3
France
Apr 74
0.8
8.5
6.7
2.1
France
Apr 74
1.6
7.7
13.2
17.7
United Kingdom
Apr 74
3.4
2.5
0.5
2.4
United Kingdom
Apr 74
3.;
10.3
15.2
27.0
Italy
Apr 74
3.0
4.6
14.0
-10.2
Italy
Apr 74
1.2
9.2
10.3
26.0
Catreda
Apr 74
0.4
0.8
5.0
7.9
Canada
Apr 74
0.7
6.0
9.9
11.4
RETAIL SALES*
Current Prices
Average Annual
Growth Rare Since
Average Annual
Growth Rate Since
Percent Change
Latest Iron Previous
Month Month
I Year 3 Months
1970 Earlier Earlier"
Percent Change
Latest Iron Previous
Month Month
I Year 3 Months
1970 Earlier Earlier
United States
May 74
1.0
10.3
8.8
13.9
Unit
ed States
May 74
1.0
7.0
.0
10.0
Japan
Feb 74
-2.2
13.2
17.6
8.8
Japa
n
Mar 74
2.6
10.0
15.4
15.7
West Germany
Feb 74
0.9
8.7
0.9
11.4
Wes
t German
y
Mar 74
2.0
9.2
-0.8
9.0
France
Feb 74
0.8
7.0
12.9
29.0
Fran
ce
Feb 74
-0.3
11.9
9.0
14.9
United Kingdom
Mar 74
1.3
12.0
9.4
6.5
Unit
ed Kingdo
m
Apr 74
2.7
9.3
3.0
1.0
Italy
Nov 73
-3.3
18.4
34.1
100.2
Italy
Dec 73
2.6
21.2
17.9
22.1
Canada
Mar 74
-1.0
11.4
11.8
23.1
Cana
da
Apr 74
4.2
13.8
14.4
18.5
1 Year 3 Months I Month
Representative Rates Latest Date Earlier Earlier Earlier
United States
Prime finance paper
Jun 12 1
9.00
7.50
7.50
9.25
Japan
Call money
Jun 7
12.00
8.63
12.00
12.00
West Germany
Interbank loans(3Months)
Jun 5
9.50
12.63
11.00
9.13
France
Call money
Jun 12
9.28
7.62
12.38
12.88
United Kingdom
Local authority deposits
Jun 12
12.38
7.36
15.75
13.63
'Seasonally adjusted.
"Averapa for latest 3 months compared
Canada
Finance paper
Jun 12
11.05
6.88
8.38
11.50
with average for previous 3 months.
Euro?Dollars
Three-month deposits
Jun 12
11.74
8.75
8.89
11.75
19 June 1974
Office of Economic Research/CIA
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EXPORTS"
Lab.
(Mast Manlln
United Slates
Apr 74
Mdliou US S
0,230
Japan
May 74
4,070
West Germany
Apr 74
7,734
France
May 74
3,032
United Kingdom
Apr 74
3,052
Italy
Apr 74
2,602
Canada
Apr 74
2,429
IMPORTS'
f.o.b.
United States
Apr 74
Million US S
8,138
Japan
May 74
4,907
West Germany
Apr 74
5,423
France
May 74
4.467
United Kingdom
Apr 74
4,201
Italy
Apr 74
3,368
Canada
Apr 74
2,306
TRADE BALANCE"
f.o.b./f.o.b.
Lalesl Month
Million US S
United States
Apr74
92
Japan
May 74
-231
West Germany
Apr 74
2,310
France
May 74
-635
United Kingdom
Apr 74
-1,149
Italy
Apr 74
-868
Canada
Apr 74
123
BASIC BALANCE"
EXTERNAL ECONOM1!iC INDICATORS
Cunmhnhvu
.___...._...-..__..-.___...
Million US S
1974 11113
30,024 20,000
19,90' 13,014
20,070 19,070
18,151 13,000
10,754 0,801
8,827 5,700
10,010 7,978
I'nn'enl
Change
40.E
44.6
47.2
31.5
:2.2
53.0
25.6
Million US $ Percent
1974 11113 Change
29,843 21,545 38.5
21,542 11,398 89.0
19,720 14,994 31.6
19,845 13,281 49.4
14,791; 9,798 51.0
11 580 6,406 00.8
9,560 7,290 31.1
Conmlarwe (Million Its SI
1974 1973
781 -637
-1,579 2,416
8,355 4,075
-1,694 519
-4.036 -995
-2,753 -038
449 688
Change
1,418
-3,995
4,280
-2,213
-3,041
-?2,115
-238
Current and Long-Term-Capital Transactions
Latest Period Cumulative (Million US S)
Million US S 1973 1972
Uri:ted States'
73 IV
214
1,209
-9,838
Japan
May 74
-5
-5,893
-3,594
West Germany
Apr 74
860
3,271
917
France
73 IV
-352
-2,391
-369
United Kingdom
73 IV
-1.394
-3,164
-1,989
Italy
72 IV
800
N.A.
2,983
Canada
73 IV
27
376
1.155
1 Year
End ul Nation US S Jun 1970 Earlier
United States
Apr 74
14.7
19.3
14.0
Japan
May 74
13.2
4.1
15.9
West Germany
Mar 74
32.9
8.8
32.3
France
May 74
8.1
4.4
11.6
United Kingdom
May 74
6.9
2.8
6.7
Italy
Mar 74
6.7
4.7
6.3
Canada
May 74
0.2
4.3
8.1
'Seasonally adjusted.
"Converted into US dollars at current market rates of exchange.
19 June 1974
"'Weighting is based on each listed country's trade with 16 other Industrialized
countries to reflect the competitive impact of exchange-rate variations
among the major currencies.
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Change
11,047
-2,299
2,354
-2,022
-1,175
NA.
-779
EXPORT PRICES
United Status
Japan
West Germany
France
Unified Kingdom
Italy
Canada
EXPORT PRICES
National Currency
United States
Japan
West Germany
France
United Kingdom
Italy
C a nad a
IMPORT PRICES
National Currency
United States
Japan
West Germany
France
United Kingdom
Italy
Canada
1'111cont Change -
Latest limn Ihyvmus
Avemilu Annual
Srowth Itnle Sake
Month Month 111711
Apr 14 0.0 11.5
Jae 74 0.1 13.4
Mar 74 6,9 13.9
Jan 74 -5.9 11.1
Dec 73 0.1 0.7
Nov 73 -2.4 10.5
Fah 74 4.1 12.4
I Year
Lanier
30.3
31.4
21.9
18.9
17.4
21.3
34.3
:1 Morllns
Cmhor
23.5
8.0
37.5
-36.2
12.0
12.4
05.0
Average Annual
Giuwlh [late Since
Ihucenl Change `-----------_.-.`---
Lalr.ol haul I'ruvious 1 Year ? Munlhs
Month Month 1970 Father Father
Apr 74 0.6 11.5 30.3 23.5
Jan 74 0.8 7.6 27.3 71.3
Mar 74 2.3 4.1 13,0 30.0
Jon 74 3.2 8.0 17.6 31.3
Doc 73 3.1 9.8 18.8 33.0
Nov 73 2.0 8.7 22.8 22.9
Feb 74 2.7 10.3 31.8 51.5
Aver, o' Amoral
Growth Italy since
Latest hum Picvmus I Year 3 Mnnlhs
Month Month 1970 billet Ear her
Apr 74
Jan 74
Mar 74
Jan 74
Dec 73
Nov 73
Fob 74
EXCHANGE RATES Spot Rate
As of 14June 74
JapanlYenl
West Germany Maukl
Francelrrancl
(Pu111111
United Kingdom Slmhnll)
Italy 1Linal
Canada IDnearl
US S
Per Unil
0.0035
0.3976
0.2036
2.3925
0.0015
1.0370
6.3 19.0 48.6 98.2
13.1 10.8 43.1 170.0
1.8 6.2 25.7 58.1
14.9 11.3 33.0 127.4
4.5 16.3 42.0 50.6
3.5 14.8 42.3 30.8
3.6 7.9 21.3 42.4
18 Dec 19 Mar
Dec 66 1971 1973
28.20 8.93 -0.99
58.15 28.13 12.28
0.84 3.40 -1.62
-14.27 -8.18 -2.78
-4.18 -10.81 -13.33
12.42 3.93 3.94
TRADE-WEIGHTED EXCHANGE RATES*
7 Jun
1974
-0.08
-1.24
-0.54
-0.46
-1.35
-0.12
3 Months
18 Dec 19 Mar 7 Jun
Earlier
Dec 66 1971 1973 1974
14.0
United States
-17.16
-7.77
-1.13
0.39
11.9
Japan
16.82
3.06
-C.85
0.10
33.1
West Germany
33.69
16.55
11.49
-0.59
8.1
France
-22.53
-8.96
-11.41
0.34
B.r,
United Kingdom
-34.09
-19.88
-5.50
-0.02
8.4
Italy
-26.38
-24.99
-18.08
-0.63
6.2
Canada
9.08
2.47
4.11
0
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Confidential
Annex to
Economic Intelligence Weekly
Canada: Inflation Overshadows
Good Growth Record
Confidential
CIA No. 8130/74/A
19 June 1974
Copy N2 372
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..onnaennai
CANADA: INFLATION OVERSHADOWS GOOD GROWTH RECORD
1. Canada's economic boom, which carried through the first quarter of 1974,
is giving way to ;Merely moderate growth. Weakened demand probably will hold
the rise in real GNP for the full year to about 4-1/2%, compared with the 1965-73
average of 5-1/2%. No other major developed country has much chance of matching
this perft mance in 1974.
2. Canada has been able to do well despite economic stagnation in most
other major industrial nations. The economy has benefited from an investment
boom in residential construction and in manufacturing facilities designed to serve
the domestic and export markets. Unaffected by the world oil crisis, consumer
demand for automobiles and other durable consumer goods has remained strong.
Although real demand for exports has slipped, soaring world prices for Canada's
raw material exports have provided an ample inflow of foreign exchange. Ottawa
thus has been able to continue a moderately expansionary economic policy without
worrying about the balance of payments.
3. With the fading of the oil crisis and the acceleration of price increases
to an annual rate of 13% in recent months, inflation has become the public's
overriding concern. Disagreement on how to deal with price rises percipitated the
fall of the Trudeau coalition government in May. The inflation issue likewise is
dominating the campaign preceding the 8 Jury election.
4. Since early polls suggest that voters will not make a clearcut choice
between Trudeau's Liberals and the opposition Conservatives, Canada seems headed
for another coalition government including the New Democrats as minor partner.
Whichever party heads the government, economic policy probably will remain
moderately expansionary because the party, in seeking to bolster its position with
the voters, will wish to avoid action that would ;isk jobs. Prospects thus are for
only moderate relief from inflationary pressures in the second half. Even the
expected 4% growth rate in the second half will not prevent an appreciable rise
in the unemployment rate, possibly to a politically damaging 6-1/2% by yearend.
5. In spite of improved terms of trade, we expect Canada's trade surplus
(imports f.o.b.) to drop in 1974 to about $1.4 billion - two-thirds that of last
year. Export volume probably will dip slightly, since prospects are for reduced
deliveries of wheat, crude oil, motor vehicles, and automotive parts. The balance
on service transactions should also worsen, but the resulting current account deficit
will probably be partly offset by an increased inflow of long-term capital.
The Economy on the Eve of the Election
6. Real GNP advanced at a rate of 6% in January-March over the
corresponding period of 1973, as a result of increased private investment outlays --
particularly for manufacturing plants and housing - and buoyant consumer
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Confldential
demand. Small losses in real wages were offset by increascrl welfare payments,
by an income-tax indexing scheme designed to maintain real disposable income
in spite of rapid inflation, and by strong employment gains. In March the number
of employed workers reached 9.1 million, a gain of 150,000 since December.
7. In the current quarter, Canadian economic growth apparently has slowed
to about a 4% annual rate because of a slower increase in demand. Through April,
only Canada and France - among the major developed countries - had avoided
a decline in industrial output (seasonally adjusted) from the November level.
INDUSTRIAL PRODUCTION
Percent Change April 1974 over November 1973
United West United
Statls Japan Germany Kingdom itely
8. The value of Canadian trade is growing much faster than we foresaw
a few months ago because prices have risen more than anticipated. The 25% gain
in export earnings in January-March from a year earlier was made up of a 30%
rise in prices and a 3-1/2% drop in volume. At the same, the continued domestic
boom and soaring foreign prices boosted imports by 30%. The First-quarter trade
surplus consequently slipped to $320 million from $515 million a year earlier.
A strike by St. Lawrence River pilots brought a 10% decline in the value of trade
in April, without further damage to the surplus. The huge increase in world oil
2
Confidential
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Confidential
prices has had little effect on the, trade b lance, since the rising cost of oil imports
for eastern Canada has been largely offset by p:icc hikes on sales of west Ca radian
crude to the United States.
9. Heavy inflows of short-teim capital from the United States, have kept
the Canadian dollar strong in spite of a deteriorating basic balance. These inflows
have eased since March, when US interest rates turned up again. Although Ottawa
has increased its foreign reserve holdings by $400 million since last December to
$6.2 billion, the value of the Canadian dollar has climbed from parity with the
US dollar to $1.04.
10. The good growth record has brought small comfort to the
inflation-harassed consumer. The rise in the cost of living hit an annual rate of
11% in the first four months, reflecting mainly higher world commodity prices
and wage settlements averaging 11%. Strong domestic demand, fueled by a 14%
growth in the money supply through April, contributed to inflationary pressures.
In May, higher food and petroleum prices pushed inflation up to an annual rate
of 22%, to the dismay of the rank-and-file citizen.
11. The fact that inflation is less severe in Canada than in most industrial
nations has done little to temper the issue. In May, rising prices l:d to increasing
friction between Trudeau's Liberals and the New Democratic Party (NDP), their
informal coalition partner. The government was toppled when the New Democrats
joined the Conservative opposition in voting against Trudeau's proposed budget
for fiscal 1975 because it lacked anti-inflation measures. Trudeau already had
dismissed NDP demands to hold domestic prices of basic commodities below world
market levels and had rebuffed a Tory proposal for sweeping price and wage
controls. Instead, he proposed a moderately expansionary budget stressing output
and jobs.
Harsh Anti-Inflation Policy Unlikely
12. The new government will confront substantial -- though somewhat
reduced - inflationary pressures. While food prices should now begin leveling off,
rising prices of other raw materials are pushing up other prices. Steel producers,
for example, increased prices 12% in May to cover higher raw material costs. Equally
important, union militancy is rising as workers attempt to keep pace with inflation.
Expected wage settlements yielding 10%-l 1% increases for the next 12 months
will add substantially to unit labor costs.
13. Whether headed by Liberals or Conservatives, the next government will
be under considerable popular pressure to do something about prices. But if its
hold on the reins of government is precarious, as seems likely, the dominant party
will want to avoid a clash on the size of wage settlements as well as responsibility
for idling workers through fiscal and monetary constraints. If Trudeau returns to
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 Approved For Release 2009/09/29: CIA-RDP85T00875RO01500150027-7
power, he may opt for selective price controls on a few key consumer goods.
The Tories, on the other hand, probably would introduce a 60-90-day wage-price
Breeze to be followed by a period of flexible controls. At best, only a small
reduction in the inflation rate, to 10%-11 o, is in prospect for the second half.
Slowing Output Growth and Rising Unemployment
14. Even without restrictive government action, demand pressures are likely
to be substantially lower in the second half. Consumer spending clearly is
weakening, and private investment outlays show signs of being,, stretched out.
Increased provincial mining tax,,s last spring are delaying large mining projects,
and investors' confidence has been shaken further by the prospect of stiffer federal
taxes on mining and petroleum companies. We believe the advance in real GNP
will be held to about 4% in the second half, compared with 5% in the first half.
Even with this moderate slowing of growth, the jobless rate could climb by one
percentage point, to 6-1/2%.
A Small Basic-Balance Deficit
15. The trade surplus for the full year can be expected to show a substantial
decline from last year. The drop probably will not be as sharp as in the first
quarter, sine slowing Canadian output growth will reduce the gain in import volume
for the ear to perhaps two-thirds of the 1973 rate. We project the increase in
the value of exports for the full year at 23% over 1973. The expected small decline
in export volume mainly reflects prospects that shipments of crude oil, wheat,
and motor vehicles and parts will be appreciably smaller this year than last. Crude
oil shipments will continue to be held back by increased domestic requirements,
while wheat export sales probably will be depressed by the bad crop weather in
May and early June. Automobile sales volume is expected to continue to be
hampered by reduced US demand. We believe these declines, together with expected
slow growth of sales volumes and easing of prices for metals and minerals, will
help to cut the trade surplus to $1.4 billion, $700 million below 1973.
16. Despite a large probable gain in long-term capital inflows compared with
1973, we believe that reduction of the trade surplus will cause a small basic-balance
deficit. Our projection is as follows:
Million US $
Trade balance
2,131
1,400
Net services
-2,466
-2,700
Current account balance
-335
-1,300
Net long-terns capital
667
1,000
Basic balance
332
-300
4
Confidential
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Confidential
Canada: Projected 1974 Trade
Value in
1973
Projected Increase in 1974
(Percent)
Projected Value
Billi
in 1974
on
(
US $)
Volume
Price
Value
(Billion US $)
Exports (f.o.b.)
25.2
-2
26
23
31.0
Agricultural and fisheries
products
3.3
-7
66
55
5.1
Of which:
Wheat and wheat flour
1.3
-20
150
100
2.6
Metals and minerals
5.1
3
7
10
5.7
Crude oil
1.5
-35
230
150
3.7
Motor vehicles and parts
5.4
-15
10
-6
5.1
Other manufactures and mis-
cellaneous
9.9
8
7
15
11.4
Imports (f.o.b.)
23.3
8
18
213
29.8
Crude oil
0.9
4
250
235
3.1
Industrial and construction
materials
5.5
7
12
20
6.6
Motor vehicles and parts
6.3
5
10
16
7.3
Capital equipment
5.6
14
7
22
6.8
Consumer goods wnd miscel-
laneous
5.0
8
12
21
6.0
Trade balance, customs basis
1.9
....
....
....
1.2
Adjustment for balance-of-
payments purposes
0.2
....
....
....
0.2
Trade balance, adjusted
2.1
....
....
....
1.4
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? CANAD-A: , INTERNAL ECONOMIC INDICATORS
180
170
160
150
140
INDUSTRIAL PRODUCTION"
Annual Growth Rote (Percent)
8.3
1908.73
Average
100 I11_1 1 1 11~!_L_L1_LL11__LL_1U_I 1 1 1
1972 1973 1974
'Seasonally Adjusted.
"Increase over comparable period of 1973.
180
170
160
150
140
1988.73 1973 Apr
Average 1974-
too 1_LLI__Ll__l__1_~._LJ
1972 1973 1974
'Seasonally Adjusted.
"Increase over comparable period of 1973.
Igo
170
100
150
140
130
120
110
m
9.6
1973 1st gtr.1974*
Cun;unur ~~~
100 L--l l l l I .1 I I I 1 1.1 ~_ L_1_1 11 J _L L1._1 1 LI
1972 1973 1974
Jan Jan Jan Jan Apr Jul Oct Jan Apt
1970 1971 1972 1973 1974
Note: End of period.
Annual Growth Rate (Percent)
20.4
5.2 4.5
1988.73
Average
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CANADA: EXTERNAL ECONOMIC INDICATORS
TERMS OF TRADE
140- National Currency
EXCHANGE RATES FOR THE CANADIAN DOLLAR
Percent Change from 18 Dec 71
1
1972
Jlradc-waiulltcd avcrauc) I I I I I I 11 1
IV I I I III Oct Nov Dec Jan Feb Mar Apr May
1973 1974
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CANADA: EXTERNAL ECONOMIC INDICATORS
VALUE OF TRADE
5 r-
0 11 1
1970 71 72
1_ I 1 I 11111
73 I II III IVJFMA
1973 1974
TRADE BALANCE
f.o.b./f.o.b.
0.74 0.78
0.5 0.3
1968.72 72 73 2nd Half IstOir. 2nd Half 1st Oir.
Average 1972 73 73 1974
Mar
74
Seasonally Adjusted.
West Germany
Japan
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