INDUSTRIALIZED COUNTRIES: THE INCIPIENT ECONOMIC RECOVERY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00555R000200170002-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 21, 2016
• Document Release Date: December 31, 2007
• Sequence Number: 2
• Publication Date: August 1, 1983
• Content Type: REPORT

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Directorate of Uontldential
Intelligence
The Incipient
Economic Recovery
Industrialized Countries:
An Intelligence Assessment
Confidential
EUR 83-10211
August 1983
Copy 3 7 7
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Directorate of Confidential
Intelligence
Industrialized Countries:
The Incipient
Economic Recovery
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of European Analysis, with contributions from
other analysts in the Office of European Analysis
and the Office of East Asian Analysis. Com-
ments and queries are welcome and may be
directed to the Chief, Economic Issues Branch,
EURA
Confidential
EUR 83-10211
August 1982
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Industrialized Countries:
The Incipient
Economic Recovery
Key Judgments The industrialized countries are pulling out of the recession, but not
Information available uniformly and not at the rapid pace of earlier recoveries. Economic growth
as of 15 August 1983 in the United States and Japan, for example, is expected to outpace growth
was used in this report.
in most of Western Europe. Real gross national product for the industrial-
ized countries as a group will probably advance only 2 percent this year-
less than half the rate during the 1976 recovery. Although we expect some
acceleration next year, growth in most countries will remain relatively slow
by historical standards. 25X1
No individual economic sector in the industrialized countries is likely to be
particularly bright in 1983. Consumer spending will be held down by the
depressed labor market, and investment for machinery and equipment will
be slack because unused capacity and real interest rates are high. Although
increased trade among the countries of the Organization for Economic
Cooperation and Development (OECD) will help to improve economic
activity in some countries, exports outside the region probably will slip in
real terms. Both OPEC and the nonoil LDCs are stru lin with financial
constraints that are forcing them to reduce imports. 25X1
Government policies are not likely to provide much help for the weak
economies. Although most OECD governments are relaxing monetary
policies, most also are tightening their fiscal stance. Nominal interest rates
have come down appreciably from the 1981 highs, and many monetary
authorities are continuing to follow policies aimed at bringing interest rates
down further. The major foreign governments, however, are loath to push
interest rates down too far without comparable reductions in US rates out
of concern about further weakening of their currencies. On the fiscal side,
most governments are cutting spending programs and raising taxes in an
effort to cope with outsized budget deficits. 25X1
Unemployment will continue to worsen in many industrialized countries
this year. Economic growth will be too slow in most countries to create
enough new jobs to offset increases in the labor force, although the United
States and Japan may see some improvement in jobless rates. As a result,
we expect overall unemployment in the Big Six industrialized countries to
rise to 13 million persons-up an average 25 percent above the 1982 level.
iii Confidential
EUR 83-10211
August 1982
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On the positive side, slow growth coupled with soft oil prices-we assume
oil prices will average roughly $29 per barrel in 1983-should lead to lower
inflation and improved current account positions for the majority of
developed countries in 1983. Inflation for the OECD countries as a group
should slow to perhaps only 5 to 6 percent, the smallest price rise since
1972. We expect the current account balance of the non-US OECD
countries to turn positive this year-a $37 billion improvement over 1982.
The recovery should pick up momentum in 1984, with the non-US OECD
economies growing at about 3.1 percent. Most OECD governments
probably will maintain their present policy stance of reducing budget
deficits while moderately relaxing monetary policy. The resulting reduction
in real interest rates should help stimulate consumer and business spend-
ing. Although the expansion should be strong enough to stop the rise in un-
employment, it probably will not be vigorous enough to quicken inflation.
The large number of jobless workers will help moderate wage demands,
and record-high excess capacity should also ease cost increases for
manufacturers. We expect the current account surplus of the non-US
OECD to rise slightly to $15.8 billion in 1984 because of faster export
growth. The comparatively strong US recovery is likely to absorb much of
the higher output elsewhere in the OECD, thus keeping the balance-of-
payments position of most OECD countries from weakening substantially.
Some downside risk, however, also exists. Probably the biggest factor that
could lead to slower OECD growth would be a sharper fall in LDC
purchases from the developed countries than we have assumed. Continuing
economic difficulties and the specter of additional debt rescheduling in
such countries as Brazil and Mexico could lead LDCs to introduce new
measures to reduce imports. Results from the LPIM indicate that each
additional 1-percent drop in LDC imports would shave 0.1 percentage
point from OECD economic growth.
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Key Judgments
Slow Recovery in 1983
Consumption
Foreign Trade
Worsening Unemployment
Slowing Inflation
Sensitivity Factors Affecting the Forecast
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The Incipient
Economic Recovery
A Dismal 1982
Real GNP growth in the non-US OECD ' countries
was disappointingly weak in 1982 for the second year
in a row, rising just 0.7 percent compared with 0.8
percent in 1981. The recessionary effects of the
1979-80 oil price hikes continued to work through the
OECD economies, and restrictive fiscal and monetary
policies further dampened economic growth. Al-
though interest rates in most countries declined some-
what from their 1981 peak, they remained high by
historical standards.
Slack domestic demand in the OECD was reinforced
by a shrinking demand for imports by the non-OECD
countries. For the first time since World War II, the
value of world trade contracted, falling an estimated
6 percent; in volume terms, trade was down 2 percent.
Export earnings by the less developed countries were
hurt by weak OECD import demand and falling
commodity prices. Lower exports, coupled with in-
creasing financial constraints, caused the LDCs to
reduce their purchases from the OECD by almost
7 percent last year. In contrast, during the 1970s the
LDC market was a major growth sector for OECD
exporters. Despite last year's decline, LDCs still
account for almost one-fourth of OECD exports, up
from 18 percent in 1970.
Half of the Big Six economies-West Germany,
Canada, and Italy-contracted in 1982. In West
Germany, a first-quarter spurt in export volume was
short lived and could not counter yearlong declines in
consumption and investment. The Canadian economy
slumped by a record 4.8 percent, with nearly every
major sector receding; only government consumption
advanced. Italian exports and government consump-
tion rose 3 percent and 1.5 percent, respectively, but
declines in other sectors more than offset the gains.
Japan, France, and the United Kingdom posted posi-
tive economic growth in 1982-Japan by 3 percent
and France and the United Kingdom at about half
that pace. Japanese GNP advanced on the strength of
consumption and exports. French growth, running at
a 2-percent annual rate in the first half, slowed at
midyear because of an austerity package designed to
control inflation and bolster the franc. The British
economy, buoyed by investment, showed the first
signs of recovery after a protracted recession that
began in early 1980.
Unemployment everywhere continued to climb
throughout the year (see figure 1). For the OECD as a
whole, the number of unemployed increased 20 per-
cent in 1982 on top of the 15-percent jump in 1981.
By the end of last year, an estimated 30 million people
in the OECD countries were unable to find work, and
the unemployment rate reached double-digit levels in
four of the Big Seven countries. While Japan contin-
ued to hold its unemployment rate to about 2.5
percent, the 10-member European Community saw
unemployment swell to 10.5 percent of the labor force
by yearend; Ireland led the Community with an
unemployment rate of almost 14 percent. Some other
OECD countries were even worse off: Spanish unem-
ployment topped 17 percent while Turkish unemploy-
The Organization for Economic Cooperation and Development
(OECD) includes 24 countries: Austria, Belgium, Denmark, Fin-
land, France, Greece, Iceland, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Tur-
key, the United Kingdom, and West Germany in Western Europe;
the United States and Canada in North America; and Japan,
Australia, and New Zealand in the Pacific. The Big Seven
countries, which are the seven largest economies in the OECD, are
the United States, Japan, West Germany, France, the United
Kingdom, Italy, and Canada; the Big Six consist of the Big Seven
ment reached an estimated 20 percent.
On the brighter side, stagnant economic conditions
had a salutary effect on inflation. Weak demand, as
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Figure 1
OECD: Unemployment Rates
for Selected Countries
United States
European
Communitya
1J
1970
80
well as lower wage increases, reduced upward pres-
sure on prices, and slower monetary growth dimin-
ished inflation expectations. The overall OECD infla-
tion rate slowed more than 2.5 percentage points from
1981, to an average 7.7 percent for the year. Among
the Big Six, the British inflation rate improved the
most, falling from just under 12 percent in 1981 to 8.5
percent in 1982. Still, inflation remained in double
digits for France, Italy, and Canada, as well as for 12
of the 17 smaller OECD countries.
Progress in lowering the OECD current account
deficit came to a halt in 1982 after improving by
nearly $40 billion in 1981 when imports of oil declined
while exports, particularly to OPEC, continued to
climb. The OECD current account deficit increased
only $4.4 billion last year, to $33.4 billion. Of the Big
Six, West Germany's current account showed the
biggest swing, from a $7.6 billion deficit in 1981 to a
$3.1 billion surplus in 1982. The depreciation of the
West German mark, accompanied by stagnant import
demand, led to most of the improvement. In France,
on the other hand, the current account deficit almost
Figure 2
OECD: GNP Growth Rates
for Selected Countries
European
Community
doubled last year because the stimulative policies
adopted after Mitterrand's election led to a rapid
increase in imports. The current account positions of
most other non-US OECD countries changed little, as
declining oil imports offset falling exports to LDCs. F
Slow Recovery in 1983 1
The OECD economies are beginning to pick up steam,
but in most countries growth will be comparatively
weaker than in previous recoveries (see figure 2). For
the non-US OECD countries, we expect real econom-
ic growth to average 1.6 percent, with the Big Six
' Our economic projections for 1983 and 1984 are primarily the
judgments of CIA country analysts. As a starting point, each
analyst was provided with a projection for the world price of oil and
for the demand for imports by LDCs and Communist countries.
The forecast for the US economy
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most of the major West European countries are likely
to advance by 1 percent or less; the French and Italian
economies may show almost no growth at all. The
West European countries are lagging in part because
they suffer from more severe structural problems and
because government spending cuts and tax increases
imposed to reduce deficits are retarding growth.
The recession appears to have bottomed out in most 25X1
major countries by the end of 1982 or the first quarter
of 1983. Leading indicators have been rising in most
countries for the past six months, and industrial
production recently has begun to improve. Prelimi-
nary first-quarter results show GNP growth picking
up in most of the Big Six countries. In France,
however, the rate of economic growth continued to
slow, and in Italy it was virtually flat.F__~ 25X1
The recent fall in interest rates, the decline in oil
prices, the end of inventory rundown, and lower
inflationary expectations are all factors that should
promote the economic recovery. Indeed, economic
sentiment, as measured by surveys of industrialists
and consumers and by stock exchange prices, has been
improving since the beginning of the year. No individ-
ual country or economic sector, however, will be
sufficiently dynamic to lead the OECD economies out
of recession)
Consumption. In most of the Big Six countries,
consumer spending will remain weak through 1983
(see table 2). Although recent surveys by the EC
Commission indicate that consumers have adopted a
less pessimistic view of the economic and financial
situation, the surveys also show that consumers re-
main unwilling to purchase big ticket items. We
believe continued high unemployment and expected
low wage gains will be the primary factors inhibiting a 25X1
pickup in spending 25X1
expanding 1.9 percent and the smaller countries grow- On a country-by-country basis, the role of consump-
ing at 0.7 percent In the first year tion in the economic recovery will vary appreciably. 25X1
following the 1974/75 recession, the non-US OECD Consumer spending in the United Kingdom and
economies expanded by almost 5 percent Japan will be relatively buoyant at 2.2 percent and 25X1
4.2 percent, respectively; London reduced personal
The OECD countries will not grow uniformly, how- income taxes this year, and consumers in both coun-
ever. While the United States and Japan are expected tries are reducing savings rates to maintain spending.
to post growth of 3 and almost 4 percent, respectively,
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Table 2
Big Six: Major Components of GNP
Percent change
from previous year
United
Kingdom
Italy
Canada
Fixed investment
1.0
2.1
-6.2
2.8
0.5
-2.5
3.5 3.5
-4.0
-2.7
-12.1
-4.1
Additions to inventory
0.4
0.4
0.3
-0.4
1.4
0.5
1.1 0.7
NEGL
0.1
-2.9
0.7
Exports of goods and
services
3.3
5.2
3.7
2.7
-3.7
1.5
0.7 2.8
3.0
2.5
-1.5
1.6
Imports of goods and
services
Canadian consumers are regaining confidence in the
economy, in part because of the expected boost from
the more buoyant US economy, since the United
States purchases 70 percent of Canada's exports;
improving real wages will spur consumption. In Italy,
consumer spending is expected to grow almost 1 per-
cent as moderate wage gains hold down real incomes.
Consumers in France and West Germany, on the
other hand, are expected to increase real spending
only slightly, if at all. In France, higher taxes and
utility rates-announced in March 1983 as part of the
austerity program-will cut into household budgets,
holding the increase in consumption to 0.2 percent.
Utility and transportation rates were raised an aver-
age 8 percent, and oil import tax hikes offset the fall
in oil prices to consumers. Paris boosted social securi-
ty tax rates by 1 percentage point and increased taxes
on alcohol and tobacco. The Mitterrand government
also placed a 10-percent surtax on all people liable for
at least 5,000 francs in income tax.
In West Germany, the spring round of annual wage
negotiations by the major unions yielded increases of
less than 3 percent for most union members, and the
federal government plans to hold public-sector wage
increases to only 2 percent. We expect consumer
prices in West Germany to rise almost 3 percent this
year. In addition, consumers face a 1-percentage-point
increase in the value-added tax on 1 July, a 5-percent
surtax on taxable incomes above $20,000, and a 0.6-
percentage-point increase (to 14.6 percent of taxable
income) in employee contributions to the government-
run unemployment fund. An expected reduction in the
savings rate should cushion the decline in real dispos-
able income.
Investment. The outlook for private investment in the
OECD is also mixed. Among the Big Six, investment
growth is expected to be positive only in Japan, West
Germany, and the United Kingdom. Prospects are
brighter in the United Kingdom because excess pro-
ductive capacity began to shrink last year when the
economy started to rebound. In West Germany lower
mortgage rates and deregulation have stimulated
private residential construction. Spending on plant
and equipment, however, probably will remain weak,
as most businessmen apparently are not yet convinced
the recovery has started. Investment in Japan should
grow by 2.1 percent, low by Japanese standards and
an indication of cautious business attitudes. Business-
men are hoping, however, that buying by Japanese
consumers will pick up this spring and summer,
thereby lowering the amount of excess capacity that
has dampened investment.
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Canada, France, and Italy will show declines of 2 to 4
percent in investment, mainly because of excess ca-
pacity and sluggish domestic demand. To make up for
several years of poor earnings performance, business-
men in Canada are likely to wait for profits to rise
before making major investments in plant and equip-
ment. The French Government is curbing consumer
spending, which will depress investment in the short
run. According to Italian surveys, businessmen there
remain pessimistic, and industrial production has
declined in recent months.
The level of real and nominal interest rates, as well as
excess productive capacity, will be significant factors
in determining investment growth. For the 14-month
period ending April 1983, interest rates in West
Germany and the United Kingdom dropped about 5
percentage points each, to 5 and 10 percent respec-
tively, while interest rates in Japan have remained a
low 7 percent. Still, long-term interest rates are
running 3 to 4 percentage points higher than inflation
in each of the Big Six countries. By contrast, at the
end of the 1974/75 recession, real interest rates were
negative in each of the Big Six; in the United
Kingdom, interest rates were 14 percentage points
below the inflation rate. Moreover, the high level of
excess industrial capacity-about 24 percent in the
European Community-will depress demand for new
machinery and equipment.
Foreign Trade. Exports will not be a major positive
force in the OECD recovery. Much of the export
growth that does occur will be generated mainly by
increased sales to other developed countries. One of
the major impulses will come from the United States,
where vigorous economic growth and a strong dollar
will give foreign industrial economies an opportunity
to expand sales.
Most export markets outside the OECD are likely to
contract. OPEC countries probably will cut back on
their purchases from the OECD in response to lower
oil revenues. Moreover, the important nonoil LDC
market is expected to shrink by 1 to 2 percent because
of debt-financing problems and continued slack in
commodity prices. In the Communist countries, grad-
ually improving financial conditions should enable the
OECD economies to boost exports to the region by 2
to 3 percent this year. The overall level will remain
depressed, however, following the severe reductions of
East European imports of the past few years.
Among the Big Six, Japan is likely to experience the
best trade performance in 1983, with exports of goods
and services expected to post 5-percent growth. and
imports to change little in real terms. The weak yen,
coupled with rapid US economic growth, should
guarantee a strong export sector, but trade restric-
tions-or threats-by Western Europe and North
America will contain the potential export boom. The
trade picture in the other major OECD countries is
not as bright, but net foreign demand should improve
in West Germany, France, and Canada. With the 25X1
pickup in economic growth elsewhere in the OECD,
West Germany should be able to boost exports almost
3 percent while import growth should be held down by
domestic tax increases. The austerity program adopt-
ed by Paris in March 1983 should cut after-tax
income and thereby depress import demand. The
continuing weakness of the franc should further hold
back imports while helping to stimulate exports. 25X1
Canadian exports and imports, which fell in 1982,
should both grow about 1.5 percent on the strength of
the recovery at home and in the United States.
In the United Kingdom and Italy, on the other hand,
trade performance should worsen somewhat. British
exports should turn in a respectable performance,
despite the falloff in oil export revenue, as other
OECD countries pull out of the slump; the apparent
British preference for foreign consumer goods, how- 25X1
ever, is expected to boost imports by almost 5 percent.
Italian competitiveness will suffer from continuing
double-digit inflation. With the lira stabilized 'within
the European Monetary System (EMS), Italian pro-
ducers are losing sales to foreign goods at home and
abroad.
Government Policies. The overall government policy
mix this year is expected to have a positive, though
slight, impact on economic growth. Although most
governments are tightening fiscal policies, monetary
policies generally are being relaxed.
Reducing budget deficits is a major policy goal. for
many OECD countries. Japan, France, the United
Kingdom, Italy, Belgium, and the Netherlands all
plan to keep government pay hikes at or below the
expected inflation rate; West Germany, France, the
United Kingdom, Belgium, Denmark, and the Neth-
erlands are shaving social welfare programs. On the
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revenue side, almost every OECD country is raising
income, value-added, excise, or social security tax
rates; these hikes, however, are usually small because
governments do not want to abort the recovery.
West European efforts to control budget deficits are
likely to be undercut by mounting unemployment,
which triggers automatic increases in government
spending as well as revenue losses. In countries like
Italy, Belgium, and Ireland, moreover, the additional
debt incurred because of last year's outsized deficits
will more than offset the budgetary impact of lower
interest rates. While the Nakasone government in
Japan is expected to continue most of the budget cuts
proposed by former Prime Minister Suzuki, the
Trudeau government in Canada is boosting spending
to aid economic recovery.
Because of budgetary difficulties, we believe most
OECD governments will rely on monetary policy to
help pull their economies out of the slump. British
Prime Minister Thatcher, French Finance Minister
Delors, Bank of Japan Governor Maekawa, and Swiss
National Bank President Leutwiler, among others,
have stated publicly since the beginning of 1983 that
present long-term real interest rates are hampering
economic recovery. Moreover, lower interest rates
would ease the budget crunch that many OECD
governments face by lowering interest payments on
the public debt.
Most of the major industrial countries are already
relaxing monetary policies in an attempt to bring
down interest rates and ease the road to recovery.
West Germany and the United Kingdom have set
targets of 7 to 9 percent for money supply growth-
the same as last year-but lower inflation expected
this year makes these targets relatively more expan-
sionary. The Japanese want to lower interest rates by
cutting the discount rate, which has remained at 5.5
percent since December 1981, without weakening the
yen against the dollar; rumors of an impending cut
have circulated for more than a year, however. Be-
cause the Canadian Government decided in 1982 to
stabilize the Canadian dollar/US dollar exchange
rate, US monetary policy ultimately determines the
action of the Canadian monetary authorities.
The French and Italians, on the other hand, are
pursuing more restrictive monetary policies. To lower
inflation and strengthen the franc, the French Gov-
ernment has adopted a goal of 9-percent money
supply growth for 1983, down from last year's range
of 12.5 to 13.5 percent. The Bank of Italy has set
limits on credit expansion and is directing more funds
toward financing the public-sector deficit-which is
expected to reach 16 percent of GNP this year-at
the expense of private firms.
Foreign governments are reluctant to push down
interest rates too far without a comparable reduction
in US rates. West European leaders fear that unilat-
erally lowering their rates would lead to further
capital outflows and currency depreciation, which in
turn would boost the cost of imports and rekindle
inflation. During his July 1983 visit to Tokyo, West
German Economics Minister Lambsdorff told a re-
porter for the Nihon Keizai Shimbun that high US
interest rates are strengthening an already strong
dollar, thus limiting the freedom of action of other
countries. The Japanese, on the other hand, are
concerned that lower interest rates would lead to
capital outflows, a cheaper yen, and subsequently to
an export boom. Bank of Japan Governor Maekawa
told a bankers convention in April that faster export
growth would exacerbate trade tensions with the
United States, Canada, and the European Communi-
Implications of Slow Growth
Worsening Unemployment. Despite this year's im-
proved economic outlook, new workers will enter the
labor force faster than most OECD economies can
create new jobs. Unemployment in the Big Six is
expected to average 13 million in 1983-25 percent
above the average 1982 level. The United Kingdom
will continue to have the highest unemployment rate
of the Bi Six-probably averaging 13 percent for the
year With the exception of Japan, the
rest of the Big Six countries probably will see unem-
ployment rates grow to about 10 percent in 1983
before leveling off next year. Unemployment in Japan
should hover around 2.5 percent this year and next.
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Although unemployment rates are lower in many of
the smaller OECD countries than in the Big Six, the
number of jobless in the 17 smaller countries still
should top 9 million this year-about 12 percent of
the labor force. Extensive government employment
programs in some of the Scandinavian countries, a
high number of self-employed workers in Greece, and
the expulsion of jobless foreign workers from Switzer-
land account for the lower rates in those countries. In
both Turkey and Spain about 20 percent of the labor
force will be jobless.
Slowing Inflation. We expect inflation rates to con-
tinue to decline through this year to an average 5.6
percent for the OECD countries, about one-half the
1981 rate For the Big Six as a group,
inflation will stabilize at 6 percent, with rates of less
than 5 percent for West Germany and Japan. Infla-
tion in France and Italy should continue to be high,
although improving. Paris's austerity package, cou-
pled with continued jawboning and restraints on
public-sector salaries, will help to contain inflation in
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France. Offsetting some of those benefits are the
negative price effects of the fall in the franc's value,
both against the dollar and against other currencies in
the EMS. For other major OECD countries, improve-
ments on the price front will stem mainly from weak
consumer spending, moderating wage demands, soft
commodity prices, and declining interest rates.-
The smaller OECD countries also should experience a
drop in inflation, from 10.8 percent in 1982 to
9.7 percent this year and 8.9 percent in 1984. Switzer-
land, Austria, and the Netherlands will be at the low
end with inflation between 3 and 4 percent. Greece
and Turkey will continue to improve but should still
be coping with prices rising around 20 percent annual-
ly. Price increases should accelerate to more than 100
percent in Iceland.
An Improving Current Account. Continued weakness
in overall demand in many OECD countries, coupled
with lower oil prices, should help improve the current
account position of the non-US OECD countries this
year by some $37 billion; about two-thirds of the
improvement will be due to lower oil prices. As a
group they are expected to register a $14.9 billion
surplus in 1983 For the Big Six, the
balance is expected to be in surplus by $27 billion this
year. The Japanese and West German current ac-
count balances are expected to improve the most,
reaching surpluses of $23.5 billion and $10.5 billion,
respectively. Although French and Italian balances
should improve, both still will be in deficit. The
aggregate current account position of the smaller
countries will show substantial improvement but still
will register about a $12 billion deficit. Only the
Netherlands, Norway, and Switzerland will record
significant surpluses.
Prospects Brighter for 1984
We expect OECD economic growth to pick up speed On the policy front, most OECD governments proba-
next year as the recovery takes hold. For the non-US bly will maintain their present course. Measured
OECD countries, GNP growth should average 2.6 relaxation in monetary policies should help bring
percent in 1984, with the Big Six growing faster than down real interest rates, which in turn should stimu-
the smaller OECD countries. Japan, Canada, and late business and consumer spending. Most OECD
Australia are expected to post somewhat faster
growth than most of the West European economies, in
part because of the strength of the US recovery.
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governments will continue their efforts to lower bud-
get deficits gradually, and faster GNP growth should
boost revenues.
Unemployment in the non-US OECD countries
should level off at 9 percent of the labor force in 1984.
Those economies with the closest ties to the United
States-Japan, Canada, Australia, and New
Zealand-may see some improvement in unemploy-
ment. The weak pace of economic recovery in West-
ern Europe, however, will at best only stabilize unem-
ployment in the region. High West European labor
costs, both wage and nonwage, will continue to en-
courage businessmen to use more labor-saving equip-
The French current account deficit is expected. to
shrink $3 billion to $4.5 billion next year; the weak-
ness of the franc should improve the price competi-
tiveness of French goods and services at home and
abroad, and this year's tax and utility rate hikes
should dampen import demand. Faster GNP growth
ment.
There is a good chance that in 1984 inflation will
hover near the same rate as this year in the non-US
OECD countries, despite faster economic growth. As
the recovery continues, unused production capacity
will be reemployed, and businesses may attempt to
rebuild profit margins; these factors, however, should
not increase inflation until late 1984 or early 1985.
Moreover, we expect OECD growth will advance too
slowly to place significant upward pressure on com-
modity prices and wages through 1984. Of the Big
Six, only Italy is expected to confront double-digit
inflation in 1984. At the other extreme, West German
and Japanese inflation rates should remain at about 3
to 5 percent. Most of the smaller OECD countries will
make progress in lowering inflation, but Greece,
Iceland, Portugal, and Turkey are still expected to be
coping with inflation of 20 percent or more.
The OECD current account balance, after showing
improvement this year, probably will deteriorate
again next year. Without a depreciation of the dollar,
most of the worsening in the balance is likely to occur
in the United States, where economic growth will
exceed the average. The pickup in GNP growth in the
United Kingdom and Canada probably will boost
demand for imports, thereby pushing their current
account balances slightly into deficit. Japan's enor-
mous surplus should level off at about $24 billion as
import demand revives, particularly for raw materials.
On the more positive side, improved price competitive-
ness and less-than-average real GNP growth should
enable West Germany to boost its current account
surplus again in 1984, perhaps reaching $12.5 billion.
in the OECD should result in greater demand for
Italian exports, leading to a modest improvement in
the Italian current account deficit.
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Appendix A
Sensitivity Factors Affecting the Forecast
Unexpected changes in the international economic
environment would affect our forecasts for the OECD
economies. We believe that the potential develop-
ments that could have the greatest impact are:
? Faster growth for the US economy than is now
expected.
? A further decline in oil prices.
? An even sharper dropoff in imports by LDCs from
the OECD.
The US Economy
Our projection of an upturn in the OECD this year
and next hinges on the expected economic recovery in
the United States because the US economy produces
almost two-fifths of the OECD's output and absorbs
14 percent of exports by other OECD nations.
To quantify the influence of the United States on
overall OECD economic performance, we used our
Linked Policy Impact Model (LPIM) of the world
economy. Our econometric model indicates that a
1-percentage-point increase in the US growth rate
would raise overall OECD economic growth by 0.4
percentage point and non-US OECD growth by 0.1
percentage point (see table 6). Japan and Canada
would experience the greatest gains-0.2 and 0.3
percentage point, respectively-primarily because
larger shares of their exports go to the United States.
A 1-percentage-point increase in US growth would
also reduce unemployment in the non-US OECD
countries by 100,000 people. Faster growth of US
GNP, however, would speed up US import growth
and result in a deterioration in the overall OECD
current account balance-an $8 billion worsening in
the US balance would more than offset the $4 billion
improvement in the non-US current account. Reflect-
ing their reliance on the US market, Japan and
Canada, followed by West Germany, would post the
largest gains in their current account balances.
Oil Prices 25X1
A further decline in oil prices would lead to more
rapid economic growth-and lower inflation, unem-
ployment, and current account deficits-than we now
expect. Despite recent firming of crude oil prices
around the OPEC benchmark of $29 per barrel, oil
prices may come under new pressure in the months
ahead. If oil prices fall, the impact on the industrial 25X1
countries would depend on the depth and the speed of
the price cuts, as well as on the policies chosen by 25X1
OECD governments. 25X1
To estimate the effects of lower oil prices, we ran
several simulations with the LPIM. We simulated a
decline in oil prices to $25 per barrel and compared
those results with a baseline scenario in which oil
prices stayed constant at the present level of $29 per
barrel. The LPIM indicates that with the lower oil
price:
? GNP growth would be about 0.4 percentage point
higher for the OECD (see table 7).
? About 200,000 more people in OECD countries
would find jobs, leading to a 0.1-percentage, point
decline in the OECD unemployment rate.
? The average inflation rate for the OECD would fall
by 0.8 percentage point.
? The OECD current account would improve by $13
billion because developed countries would pay less
for oil imports and the falloff in exports to oil-
producing countries would be offset, although after
a lag, by more exports to oil-importing countries.
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Table 6
Change from baseline projection
OECD: Impact of a 1-Percentage-Point
Rise in US GNP Growth
GNP
Inflation
Unemployment Current
Growth
Rate
Rate Account
(percentage
(percentage
(percentage (billion
point)
point)
point) US $)
OECD
United States
1.0 0.5 -0.5 -8.4
Non-US OECD
0.1 NEGL NEGL 3.7
Big Six
0.1 NEGL -0.1 2.6
0.2
0.2
Table 7
OECD: Impact of an Oil Price Decline to $25 Per Barrel
GNP
Growth
(percentage
point)
Inflation
Rate
(percentage
point)
Unemployment
Rate
(percentage
point)
Current
Account
(billion
US $)
United States
0.4
-0.9
-0.1
2.6
Non-US OECD
0.4
-0.7
-0.1
10.7
Big Six
0.5
-0.7
-0.1
6.9
Japan
0.7
-0.9
-0.1
5.4
West Germany
0.4
-0.9
-0.2
0.8
France
0.4
-0.5
-0.1
1.6
-0.2
3.8
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Among the Big Six, Japan and Italy would benefit
most from lower oil prices because they import almost
all of their oil; GNP growth in both countries would
increase substantially. West Germany and France
also would reap an economic boost. Although the
United Kingdom and Canada are net energy export-
ers, both would benefit from lower oil prices because
nonenergy exports would expand as a result of greater
economic growth among their trading partners, and
inflation would slow
These positive effects, however, would occur only to
the extent that lower oil prices are passed through to
consumers. In most OECD countries, the strength of
the dollar has meant that oil prices in local currencies
have not fallen as much as the dollar price. Moreover,
some countries with sizable government budget defi-
cits-France, Italy, and Belgium-have boosted tax
rates on retail sales of gasoline and oil products to
lower their budget and current account deficits and
encourage further energy conservation; industrial con-
sumers usually are exempt from the new taxes and
pay less for energy, thereby helping them raise output
and employment. Most other OECD governments are
keeping their energy tax rates constant to avoid
dampening the economic recovery. The Canadian
Government, which had held the domestic oil price at
75 percent of the world level, decided to maintain the
old prices, thus narrowing the gap between domestic
and world prices.
The further oil prices fall below $25 per barrel, the
more likely that OECD governments would increase
taxes on oil. Most OECD governments want to reduce
their budget deficits, and the greater the drop in oil
prices, the easier it would be for them to raise
revenues through new taxes on oil. Moreover, govern-
ments fear that significantly lower oil prices would
erode the gains in energy conservation that have been
made since 1973. Higher energy taxes on oil would, of
course, dampen the stimulative impact of price cuts.
LDC Trade
If financial problems cause LDCs to reduce imports
from the OECD by more than we expect, the econom-
ic recovery in the developed countries probably would
be even more restrained than in our present forecast.
During the 1970s, LDCs became an increasingly
important export market for OECD countries. Be-
tween 1970 and 1981, sales to LDCs jumped from
$39 billion to $307 billion. At the same time, the
share of OECD exports going to LDCs rose from 18
percent to nearly 25 percent. By 1981, sales to LDCs
amounted to about 4 percent of OECD GNP-more
than double the share in 1970.
In 1982, however, the worldwide recession, coupled
with the deteriorating international financial position
of many LDCs, led to a 7-percent drop in the value of
LDC purchases from developed countries. OECD
sales to African OPEC members and Latin American
countries slipped 28 percent and 19 percent, respec-
tively, while exports to Mexico alone plunged 34
percent.
We used the LPIM to gauge the economic impact on
the OECD of a further drop in LDC purchases.
According to those simulations, each additional
1-percent drop in LDC imports from the OECD
would pull down OECD GNP growth by almost 0.1
percent and add 100,000 more workers to the jobless
roles (see table 8).
The Big Six countries would suffer more than the rest
of the OECD because their exports to the LDC;;
account for 6 percent of GNP, compared with 5
percent for the smaller countries and 3 percent for the
United States. If the 1-percent cutback in the volume
of total LDC imports is apportioned among only the
22 most financially troubled economies,' the overall
impact on the OECD countries would be the same,
but the United States would bear the lion's share of
the burden. US exports to LDCs are concentrated in
these countries while Big Six exports are spread more
evenly among the LDCs.
' Argentina, Bolivia, Brazil, Chile, Costa Rica, the Dominican
Republic, Jamaica, Mexico, Panama, and Peru in Latin America
and the Caribbean; Bangladesh, India, Pakistan, the Philippines,
and Thailand in Asia; and Ivory Coast, Kenya, Morocco, Sudan,
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Table 8
OECD: Impact of a 1-Percent Fall
in Exports to LDCs
OECD
United States
GNP Growth Inflation Rate Unemployment Current Account
(percentage point) (percentage point) Rate (billion US $)
(percentage point)
NEGL NEGL -3.7
NEGL NEGL - 1.1
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