INDUSTRIALIZED COUNTRIES: MEDIUM-TERM ECONOMIC PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83-00857R000200050002-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 24
• Document Creation Date: December 19, 2016
• Document Release Date: February 14, 2007
• Sequence Number: 2
• Publication Date: November 1, 1982
• Content Type: REPORT

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m Directorate of aential
Intelligence
Industrialized Countries:
Medium-Term Economic
Prospects
Confidential
EUR 82-10109
November 1982
Copy 370
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Industrialized Countries:
Medium-Term Economic
Prospects
Directorate of Confidential
This report has been prepared byl
Office of
European Analysis. Comments and queries are
welcome and may be addressed to the Chief,
Economic Issues Branch, EURA
Intelligence Council
This paper has been coordinated with the National
Confidential
EUR 82-10109
November 1982
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Industrialized Countries:
Medium-Term Economic
Prospects
Key Judgments All OECD economies have been under serious economic strain in 1982,
Information available and although recovery is expected in 1983, it will be substantially weaker
as of 29 October 1982 than previous postrecession upturns. Declining but still high real interest
was used in this report.
rates, stemming in large part from the combination of expanding budget
deficits and restrictive monetary policies, are expected to remain a major
obstacle to vigorous economic growth. The availability of substantial excess
capacity will further discourage investment. Moreover, recent surveys
indicate that consumers in many countries are not yet ready to increase
their purchases of big-ticket items
This year OECD economic growth will probably average 0.3 percent, about
1 percentage point less than in 1981; for the non-US OECD, real GNP
growth is expected to rise from last year's 0.8 percent to 1.2 percent. For
many industrial countries, particularly those in Western Europe, exports
should help the recovery-but only moderately; in January-April 1982, the
volume of OECD exports rose 1.8 percent from the same period in 1981.
An end to the drag of inventory drawdowns is expected to aid the upturn in
a number of cases. Final domestic demand probably will continue to be
weak, with private and public consumption growing on average by just over
1 percent in the major industrial nations and fixed investment posting a
small decline. Falling oil and other raw material prices, however, should
help these economies.
The brightest spot on the economic scene is the downturn in inflation rates.
For the OECD as a whole, consumer prices are expected to rise by 8.2 per-
cent, the smallest annual increase since 1978. The improvement will not be
uniform, and in some countries-such as France, Italy, and Spain-large
budget deficits and further currency depreciation probably will sustain
double-digit rates.
In addition, the OECD's current account deficit should decline dramatical-
ly because of the recent drops in prices of imported raw materials; the
overall shortfall may dip below $10 billion-roughly one-third the com-
bined 1981 deficit. Individual performances will vary substantially this
year, with Japan and the United Kingdom running hefty surpluses, while
the French current account deficit will deteriorate further to $7 billion.
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Confidential
EUR 82-10109
November 1982
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Mounting unemployment is the most serious economic problem. By
yearend 1982, total OECD unemployment could reach 29 million-about
15 percent above the 1981 level. In several countries, unemployment rates
will remain well above 10 percent; British unemployment stood at 12.7
percent in September, and about 16 percent of the Spanish labor force is
idle.
New economic stimulus, however, would intensify already serious budget
deficits. As matters now stand, monetary policies will probably ease only
slightly this year as central banks try to contain the inflationary impact of
budget deficits. In France, the government deficit will be over 3 percent of
GNP this year, after averaging less than 1 percent in 1960-80. Deficits
could exceed 10 percent of GNP in several countries, including Italy,
Denmark, and Ireland. In most of these countries, high unemployment has
boosted the cost of generous social welfare programs, while the recession
has held down revenue growth. At the same time, high interest rates have
increased debt service burdens.)
While projections for 1983 are more tentative, we expect some improve-
ment in OECD GNP growth, with the annual increase averaging almost
2.5 percent. Even this low rate of economic growth could be stymied for
several reasons. Non-OPEC LDC debt problems may curtail import
spending, while OPEC countries continue to curb imports due to the
accumulated effect of slack oil demand. The outlook for next year assumes
that nominal oil prices remain at roughly the 1982 level, that monetary and
fiscal policies do not change significantly, and that exchange rate adjust-
ments will be limited. Under this scenario, the OECD current account
probably will remain in deficit, and inflation should slow to less than 8 per-
cent. Unemployment would remain a serious problem, particularly in
Western Europe.
The strength of the US economy-which we assume will grow by 3 percent
in 1983-remains a key to the shape of the economic recovery in the rest of
the OECD. We estimate that a 1-percentage-point reduction in US GNP
growth would lower GNP growth in the other OECD countries by 0.2
percentage point. If the US recovery is weaker than expected, non-US
OECD growth would fall below the 2.1 percent now projected for 1983.
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D
Industrialized Countries:
Medium-Term Economic
Prospects
Economic Conditions in 1981
Last year real GNP growth slowed to just 0.8 percent)
in the non-US OECD ' countries, compared to 2.0
included the 19 rise in oil prices-compounded
in many cases by a sharp currency depreciation
against the US dollar-higher interest rates, and the
restrictive fiscal policies of some governments. Three
of the Big Six countries and five of the smaller OECD
nations reported declines in real GNP. Even Japan-
which had experienced a 4.2-percent gain in output in
1980-was affected by the worldwide slump, posting
percent in 19801 actors in the slowdown
just a 2.9-percent increase in GNP.
The United States and Canada bucked the trend with
higher growth rates in 1981. The Canadian economy
grew by 3 percent after virtually no growth in 1980,
while the US economy posted a 2-percent gain follow-
ing a decline in the preceding year.
The growth slowdown resulted in a sharp increase in
unemployment last year on top of already high unem-
ployment rates. For the OECD as a whole, the
number of unemployed jumped 15 percent in 1981,
reaching an estimated 25 million people out of a total
labor force of about 360 million. By the end of the
year, unemployment had reached 8 percent or more in
four of the Big Six countries; only Japan was able to
keep unemployment low, holding it to about 2 percent.
For some of the smaller OECD nations, jobless ranks
swelled to more than 10 percent by yearend; Spain's
unemployment rate, for instance, stood at nearly 15
percent. In Western Europe, the unemployment prob-
lem was intensified by the growing number of new job
' In addition to the United States, the OECD includes 23 other
countries: Austria, Belgium, Denmark, Finland, France, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the United King-
dom, and West Germany in Western Europe; 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: ist of the
Big Seven minus the United States.
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Last year's economic slowdown, however, did provide
some benefits. OECD inflation slow y~an
2 percentage points, to 10.3 percent and
the current account deficit narrowed by almost 60
percent to $29.4 billion. Among the Big Six, British
inflation improved the most, falling from 18 percent
in 1980 to just under 12 percent. For most of the
smaller OECD countries, the inflation rate remained
unchanged. Turkey, however, slashed its rate by more
than one-half to less than 40 percent through tightfist-
ed monetary and fiscal policies. Progress in bringing
down the Turkish inflation rate continued to be
evident in 1982.
Improvements in current account balances varied
widel Aided by substantial export gains,
Japan's current account position improved by $15
billion, to post a $5 billion surplus, and West
Germany's deficit decreased by $9 billion. On the
other hand, France's current account deficit remained
unchanged while Canada's widened.
Outlook for Growth in 1982 2
We expect some improvement in OECD economic
growth in the second half of the year, following little
if any growth in the first half. Industrial production
continued to register declines in the Big Seven
through the first six months of 1982. For all of this
year, we project growth for the non-US OECD coun-
tries at 1.2 percent, with the smaller OECD econo-
mies expanding 0.6 percentage point faster than the
average for the Big Six. Continued high interest rates
and fiscal austerity measures adopted by some gov-
ernments will hold back domestic demand. According
to recent surveys in the European Community, West
European consumers do not yet plan any significant
increases in spending for big-ticket items. For the Big
Six, the level of fixed investment is expected to decline
by 0.6 percent. Growth of public consumption may
slow in four of the Big Six. Although the French
austerity program is designed to cut the government
deficit, increased government consumption still will
give a substantial lift to the economy.
] Our economic projections for 1982 and 1983 are based primarily
on judgments by CIA country analysts; we considered numerous
private and public econometric forecasts in preparing our projec-
tions. CIA's Linked Policy Impact Model was used to assess the
economic impact of slower-than-expected US GNP growth and of
the French and Italian austerity programs announced in June and
July, respectively.
Confidential
Exports will be a modest growth sector for many non-
US OECD countries because the strength of the US
dollar has greatly improved their competitive posi-
tions. The expected modest pickup in the US economy
in the second half also should contribute to increased
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exports by the other OECD countries. Nevertheless,
slow economic growth in major markets will keep
exports from increasing very rapidly; we expect the
volume of Big Six exports to rise 3.5 percent this year.
An expected pickup in imports, moreover, will offset
much of the improvement. As matters now stand, we
estimate that OPEC imports will grow by 8 percent in
volume this year, compared to 23 percent in 1981.
Imports by nonoil LDCs are expected to register little,
if any, growth in volume, and economic problems in
the Soviet Bloc should lead to a decline in Communist
imports from the West.
The Unemployment Problem
Unemployment will remain a serious problem in most
OECD countries through this year and beyond (see
table 4). The number of jobless in the Big Six
countries is expected to average 11 million, about 14
percent higher than in 1981. The United Kingdom
will continue to have the most serious unemployment
problem; throughout 1982, joblessness will hover
around 3 million, 12 percent of the labor force. Adult
employment probably will stay roughly stable over the
next few months, but unemployment among youth
will continue to grow.)
ue holding the jobless rate below 3 percent.
In France and Italy, the jobless rate should remain
around 8 to 9 percent for most of 1982. West German
unemployment is expected to average about 1.8 mil-
lion, more than 6.5 percent of the labor force and by
far the highest figure in three decades. Now running
at 2.5 percent, the Japanese unemployment rate is the
highest since 1968. We expect that Japan will contin-
return home.
Unemployment shows no signs of easing in the smaller
OECD countries. For the year, the jobless ranks
probably will average about 7.5 million, a 9-percent
increase from last year. In Belgium, Ireland, the
Netherlands, Spain, and Turkey, joblessness will run
well above 10 percent. Swiss unemployment, on the
other hand, will remain below 1 percent in large part
because unemployed foreign workers are forced to
Youth unemployment will remain a particularly seri-
ous problem, and we believe that it will get worse 2
before it gets better. Largely as a result of the "baby
boomlet" of the late 1950s to mid-1960s, the working-
age population of the European Community will grow
at an annual average rate of 0.9 percent in 1981-85-
increasing the total by 8 million-compared with just
0.5 percent a year in 1971-80. In Italy, three-fourths
of the unemployed are between the ages of 14 and 29,
and in the United Kingdom, about 40 percent of the
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Table 4
Selected Countries: Unemployment
Level
(million)
Rate
(percent)
Latest Month
United States
10.6
10.1
September
Japan
1.4
2.4
July
West Germany
1.8
7.5
September
France
1.9
8.4
August
United Kingdom a
3.0
12.7
September
Italy
2.4
10.4
July
Canada
1.4
11.8
July
2.6 June
15.8 June
3.0 September
unemployed are under age 24. In West Germany,
however, apprenticeship programs have held youth
unemployment slightly below the adult rate.C
Regional differences in unemployment rates grew
markedly in 1979-81 and are widening further this
year as traditional heavy industries continue to de-
cline. In Belgium, for example, the difference between
the joblessness rate in Brabant Province and Lim-
bourg Province widened from 8 percentage points in
1979 to 12 percentage points in 1981. The unemploy-
ment rate in Limbourg, which is dependent on hard-
hit coal mining, now stands at more than 20 percent.
In the United Kingdom, the difference between un-
employment rates in Greater London and the indus-
trial West Midlands-which includes the heavy in-
dustrial center of Birmingham-widened sharply
0.5 14.2 September
0.3 7.1 July
0.5 12.6 July
NEGL 2.1 May
from 2 to 6 percentage points. The unemployment
rate in the West Midlands now exceeds 14 percent.
On the other hand, the north-south difference in Italy
narrowed during 1979-81, mainly because joblessness
in the industrialized north began to approach the
traditionally high unemployment rate in the less
developed south.
Massive Budget Deficits
Large budget deficits will continue to be a serious
problem this year for a number of OECD countries
although most governments are attempting to curb
budget growth (see table 5). The recovery in real
output is not expected to be vigorous enough to keep
unemployment insurance payments from rising or to
give a strong push to tax collections. Budget deficits
are further aggravated by high borrowing costs.
Little improvement in the budget is expected in West
Germany, the United Kingdom, or Italy. In West
Germany, the federal government expects its deficit to
reach about 40 billion deutsche marks-more than
last year's 38 billion and well beyond the original
1982 target of 26.5 billion. Continued slack economic
growth and rising unemployment have worsened the
budget outlook. In the United Kingdom the govern-
ment is projecting public-sector borrowing at 10
billion pounds for this year. The actual deficit could
be larger, particularly in light of London's past under-
estimation of outlays, the shakiness of the modest
economic recovery being projected, and the additional
spending stemming from the Falklands crisis. In Italy
the Spadolini government projected a state-sector
deficit of 65 trillion lire, equal to 13.8 percent of
GNP. That projection probably is optimistic; in recent
years, actual deficits have far exceeded projections.
Moreover, the budget assumes that the Treasury will
be able to enforce the new cash management rules
imposed on local authorities and control their borrow-
ing
France, which has been spending heavily to stimulate
the economy, will record a substantially larger deficit
than in 1981. Despite the spending cuts in the new
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Table 5
Selected Countries:
Central Government Budgets
Japan b
Canada d
(trillion yen)
(billion Canadian $)
Revenues
25.7
29.1
34.2 c
39.2 c
Revenues
42.6
49.4
62.6
59.7
Share of GNP
6.4
6.2
6.4 c
6.1 c
Share of GNP
3.6
3.5
2.4
4.7
(percent)
(percent)
West Germany d
Beligum d
(billion marks)
(billion francs)
Revenues
177.5
188.1
195.8
206.7
Revenues
954.7
1,012.4
1,098.0
1,153.5
Deficit
25.9
27.6
38.0
39.9
Deficit
211.8
300.7
428.0
354.2
Share of GNP
1.9
1.8
2.4
2.5
Share of GNP
6.5
8.7
12.0
9.1
(percent)
(percent)
France d
Netherlands d
(billionJrancs)
(billion guilders)
Share of GNP
1.4
1.3
2.7
2.9
Share of GNP
4.0
4.5
5.3
9.8
(percent)
(percent)
United Kingdom d
Spain d
(billion pounds)
(billion pesetas)
Revenues
56.5
71.8
84.6
95.0
Revenues
1,715.9
2,400.4
2,548.0
2,750.0
Expenditures
66.9
83.0
94.7
105.0
Expenditures
1,894.0
7,507.8
2,765.0
3,100.0
Deficit
10.4
11.2
10.1
10.0
Deficit
178.4
107.6
217.0
350.0
Share of GNP
5.4
5.0
4.0
3.6
Share of GNP
1.4
0.7
1.2
1.7
(percent)
(percent)
Italy d
Sweden d
(trillion lire)
(billion kronar)
Revenues
64.0
99.3
121.2
150.0
Revenues
121.9
140.0
157.3
168.9
Share of GNP
11.1
10.6
12.4
13.8
Share of GNP
8.2
9.7
13.4
14.0
(percent)
(percent)
a Based on national government estimates.
b Fiscal year starting 1 April.
CIA estimates.
d Calendar year.
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austerity program and the revenue measures an-
nounced earlier this year, Paris still expects that the
deficit will reach over 100 billion francs, about 20-30
billion francs more than in 1981. With a budget this
far into red ink, the government will be hard pressed
to meet the 12.5- to 13.5-percent money supply
growth target.
Budgetary prospects for the smaller West European
nations are not much better. In Denmark the continu-
ing lack of a parliamentary majority supporting a
concerted policy points to further difficulties in con-
taining the budget deficit, which may equal 10 per-
cent of GNP this year. In the Netherlands, conflicts
over attempts to contain the budget deficit led to the
fall of the three-party coalition government this sum-
mer. In Belgium the center-right Martens coalition
has adopted a tight budgetary policy, with ministries
supposedly barred from exceeding their allocations for
the year. Nevertheless, the government raised its
projected 1982 deficit from 200 billion Belgian francs
to 350 billion francs.
In Japan the Suzuki government has publicly stated
that its top priorities are reduction of the public-sector
deficit and reformation of the government bureaucra-
cy. Japan's government deficit for fiscal year 1981
(which ended in March 1982) was about 6 percent of
GNP, and Tokyo expects the shortfall to be slightly
smaller this year. Some observers predict, neverthe-
less, that tax collections this year will fall about
3 trillion yen short of projections. The recently an-
nounced $7.7 billion economic relief measures are
expected to provide some stimulus to business, espe-
cially residential construction. Moreover, Suzuki has
ordered that 77 percent of public works funds be spent
in the first half of the fiscal year.
In Canada, Trudeau is unlikely to achieve his aim of
lowering government expenditures and the federal
deficit because of slower-than-expected economic
growth and, to a lesser extent, tax concessions to the
oil industry. As a result, this year's federal deficit
probably will exceed Ottawa's 16 billion Canadian
dollar projection
Monetary Policy Stance
The recent declines in US interest rates will probably
set the stage for other governments to ease monetary
policies:
? Bank of Japan officials hope to trim the discount
rate but are holding off for fear of more downward
pressure on the yen that in turn would further
aggravate trade tensions with other developed coun-
tries. The recent drop in US interest rates may well
provide Tokyo with the latitude to lower the dis-
count rate.
? In West Germany the Bundesbank dismantled the
special Lombard facility, reintroduced normal Lom-
bard borrowing (borrowing secured by collateral),
and lowered the Lombard rate another percentage
point. The current rate of 8 percent compares with a
peak of 12.5 percent last fall. Bundesbank President
Poehl credited West Germany's improving current
account position and firming of the deutsche mark
for the relaxation.
? In France the Mitterrand government hopes to limit
money supply growth this year to 12.5 to 13.5
percent, but a 12-percent inflation rate and heavy
official borrowing probably will push money supply
growth beyond this target. The wage-price freeze
announced by Prime Minister Mauroy as part of the
austerity program should ease pressure on monetary
growth. If the government's income policy planned
for the postfreeze period does not succeed, catchup
wage and price hikes could eliminate the benefits
from the freeze.
? The United Kingdom seems to be loosening its
monetary policy in line with improved performance
on inflation; it recently let interest rates decline and
raised the annual target for money supply growth
from a 6- to 10- percent range to 8 to 12 percent.
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? The Italian Government, on the other hand, main-
tains that it has relatively little scope for easing
monetary policy, drawing parallels with 1975 when
a premature reversal of policy led to a balance-of-
payments crisis. Moreover, Treasury Minister
Andreatta views monetary policy as the most effec-
tive tool for controlling inflation.)
? Canada, similarly, is not expected to ease its tight
monetary policy very much because its inflation still
is in double digits. The Bank of Canada has been
trying slowly to reduce money supply growth to
rates consistent with stable prices. As a result of its
continued tight policy, money supply growth has
actually fallen below the 4- to 8-percent target for
this year.
Inflation and Current Account Deficits
In our judgment, the OECD's inflation and current
account problems should lessen this year. Inflation
should slow to 8 percent in 1982, extending the
improvement of last year. For the Big Six, inflation
will drop to an estimated 8.3 percent, with West
Germany and Japan again having the lowest rates.
Generally restrictive fiscal policies, continued moder-
ate wage demands-which are averaging 7 percent in
Japan and 4 percent in West Germany-and tight
monetary policies in West Germany should keep
inflation in these two countries at 5 percent or less. At
the other end of the spectrum, large budget deficits,
wage indexation, and continued currency depreciation
against the US dollar will combine to keep inflation in
France and Italy around 12 percent and 16.5 percent,
respectively.
Inflation will probably ease in most of the smaller
OECD countries, probably averaging 11.5 percent for
the 17 as a group. Substantial variations in perform-
ance will continue this year, with inflation averaging
only 4 to 6 percent in Austria, the Netherlands, and
Switzerland, but around 28 percent in Greece and
Turkey
We expect current account deficits for most countries
to narrow this year as a result of the expected
improvement in the OECD's terms of trade and
growth in real net foreign demand. For the Big Six,
the balance actually should swing into surplus for the
first time since 1978. Japan and the United Kingdom
will lead the way with surpluses estimated at $9
billion and $7 billion, respectively. The French cur-
rent account deficit, however, may deteriorate further
to $7 billion as a result of the continued rise in
imports-the deficit had widened to over $5 billion in
the first six months of the year. The aggregate
payments position of the smaller OECD countries will
improve, with the Netherlands and Switzerland prob-
ably recording current account surpluses.
Falling crude oil and nonoil commodity prices account
for much of the improvement in the OECD's terms of
trade with the rest of the world. In its latest assess-
ment, the OECD Secretariat estimates that the dol-
lar-price index for nonoil commodity prices will fall
5.5 percent this year, following a 7.5-percent decline
in 1981. The OECD expects the price of crude
petroleum to average about $1 less per barrel this year
than in 1981-an estimate similar to our own. As a
result of the drop in both oil and nonoil commodity
prices, the OECD's terms of trade should improve by
about 3.5 percent this year, following a 2-percent
deterioration in 1981. For the first six months of this
year, the OECD recorded almost a $10 billion dollar
improvement in its trade balance with the rest of the
world compared to the same period last year.
Prospects for 1983
Although projections for 1983 are still tentative,
current trends in commodity prices and government
policies suggest some improvement in economic
growth next year, but this growth will compare very
unfavorably with previous recoveries. On the policy
front, we expect a gradual shift toward more relaxed
monetary policies that would help reduce real interest
rates and provide a stimulus to domestic demand. On
the energy price front, we assume only marginal
increases in nominal energy prices through yearend
1983, barring some disruption in oil production. For
the year as a whole, the official OPEC price should
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average about $34 a barrel. Although nonoil commod-
ity prices may turn up next year as the pace of the
recovery picks up, the increase probably will be fairly
moderate.
For the non-US OECD, GNP may grow by roughly
2 percent in 1983, with the Big Six advancing slower
than the smaller OECD. For the larger OECD coun-
tries, we now project the following growth rates:
? Japan-about 3.1 percent.
? West Germany-around 1.5 percent.
? France-around 1.5 percent.
? United Kingdom-about 2.0 percent.
? Italy-2.5 percent.
? Canada-about 2.3 percent.
The inflation performance of the non-US OECD
countries should also improve in 1983. Single-digit
inflation rates are expected in four of the Big Six
countries; Japanese and West German inflation rates
should be below 4 percent. Many of the smaller
OECD countries may also record single-digit infla-
tion. Greece, Iceland, Portugal, and Turkey, however,
will still have inflation running at 20 percent or more
a year.
The OECD current account balance may improve
somewhat, in large part because of expected continu-
ing gains in the terms of trade. The Japanese probably
will lead the OECD with a current account surplus of
about $12 billion, with West Germany, the United
Kingdom, the Netherlands, and Switzerland also run-
ning sizable current account surpluses.
LDC growth prospects in 1983 are a major uncertain-
ty and will affect the OECD outlook. To a large
extent, LDC economies will be dependent on external
commercial borrowing for import and current account
deficit financing of $50-60 billion in 1983. Should
prospects for borrowing deteriorate in 1983, then
LDC growth and imports will fall. Our findings,
based on simulations of our Linked Policy Impact
Model of the world economy, indicate that if the
LDCs are forced to cut their aggregate growth
enough to reduce their current account deficit by $30
billion, non-US OECD GNP growth will fall by 0.5
percentage point, and the aggregate non-US OECD
current account deficit will rise by $12 billion.
Table 6
OECD: Impact of 1-Percentage-Point
Fall in US GNP Growth in 1982
Change in
GNP Growth
(percentage
point)
Change in
Current Account
Balances
(billion US $)
OECD a
-0.5
2.2
United States
-1.0
6.2
Non-US OECD a
-0.2
-4.0
Big Six a
-0.2
-3.2
Japan
-0.3
-1.3
West Germany
-0.2
-0.4
United Kingdom
-0.2
-0.5
Italy
-0.2
-0.2
Canada
-0.3
-0.7
-0.3
-0.8
Importance of the United States
in the OECD Outlook
Given its relative size, the US economy is an impor-
tant factor in our assessment of the 1982-83 OECD
outlook. Our pessimistic appraisal of average OECD
growth in 1982 largely reflects the slump in the
United States. At the same time, the optimistic
outlook for next year hinges on a recovery by the US
economy. If the US economy fails to rebound, overall
OECD real GNP growth will fall short of the 2.8-
percent increase that we now expect to see in 19831I
To quantify the influence of the United States on
overall OECD economic performance, we again used
our Linked Policy Impact Model of the world econo-
my. Our findings indicate that a 1-percentage-point
drop in the US growth rate would cut overall OECD
economic growth by 0.5 percentage point and non-US
OECD growth by 0.2 percentage point (see table 6).
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Sensitivity Factors in the
Current Account Forecast
Forecasting current account balances for the OECD
countries is inherently risky even under relatively
stable conditions. The present state of the world
economy makes our estimates that much more tenta-
tive. Declining oil consumption, LDC debt problems,
and massive currency fluctuations all are causing
major change in international trade and invisibles
flows. Because the level of OECD current account
inflows and outflows are so large-total trade alone
approached $3 trillion in 1981-even minor changes
in trading patterns or invisibles flows can generate
large shifts in the current account:
? Each 1-million-b/d change in OECD net oil imports
leads to a $12 billion shift in the balance.
? Every $1 change in the average price of crude oil
results in about a $7 billion adjustment to the
current account.
? Each 1-percentage-point change in either the vol-
ume or price of OECD imports from nonoil LDCs
causes a $2 billion shift in the balance.
? Each 1-percentage-point change in the volume or
price of LDC imports from the OECD alters the
current account by about $3 billion.
Japan and Canada experience the greatest declines-
0.3 percentage point-primarily because of the larger
share of their exports going to the United States.
Slower growth of US GNP with resulting slower
growth of imports would improve the overall OECD
current account balance; $6 billion improvement in
the US balance would outweigh a $4 billion deteriora-
tion in the non-US balance. Reflecting their reliance
on exports to the United States, Japan and Canada-
followed by the United Kingdom-would show the
largest current account deterioration.
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Appendix A
Country Prospects in 1982
In Japan real GNP probably will increase by a
remarkably low 2.4 percent, 0.5 percentage point less
than last year (see table 7). Household consumption
should recover as a result of continued low inflation
and wage settlements averaging 7 percent in major
industries. Real public consumption, on the other
hand, may grow less than 1 percent this year if Tokyo
holds to its austerity budget. The drop in real GNP in
the fourth quarter of 1981 prompted discussion of a
new stimulus package, but none has been approved.
As a gesture in this direction, the government has
placed 77 percent of public works contracts in the first
half of the current fiscal year (1 April-30 September
1982). Even so, fixed investment will remain sluggish
because of the substantial slowdown in both domestic
and foreign sales. Growth in private capital formation
is expected to pick up from less than 1 percent in 1981
to around 2 percent this year.
For West Germany we expect continued economic
stagnation until late in the year (see table 8). Domes-
tic demand will decline for the year as a whole,
although by a far smaller amount than in 1981.
Household consumption will contract again because
employment and real wage rates are declining. At the
same time, the continued weak profit position of many
firms, combined with high, albeit declining, real
interest rates, probably will inhibit firms from making
substantial outlays on plant and equipment. Construc-
tion may decline by as much as 5 percent. We expect
no additional support from Bonn beyond the modest
job creation program announced in February because
of concern over the budget deficit. The newly consti-
tuted coalition government headed by Helmut Kohl
appears certain not to implement any new spending
programs in the remainder of the year and already is
calling for spending cuts and tax increases in the
proposed 1983 budget. For the year, we expect real
public expenditures on goods and services to grow by
just 0.5 percent. By the end of the year, both private
consumption and fixed investment should begin to
pick up.
Table 7
Japan: GNP Growth
Government consumption
3.6
1.4
Fixed investment
2.3
0.9
Additions to inventory
-0.6
-0.1
Total domestic demand
0.9
2.3
Exports of goods and services
16.4
5.3
Imports of goods and services
5.7
5.6
Net foreign demand
55.0
4.6
Table 8
West Germany: GNP Growth
GNP
-0.3
NEGL
Private consumption
-1.1
-0.8
Government consumption
-2.0
0.5
Fixed investment
-3.3
-4.0
Additions to inventory
-1.4
0.2
Total domestic demand
-2.5
-1.0
Exports of goods and services
8.9
5.7
Imports of goods and services
2.1
3.1
Net foreign demand
2.1
0.9
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Table 9
France: GNP Growth
Percent Table 10
United Kingdom: GNP Growth
Additions to inventory
-2.2
0.5
Total domestic demand
1.4
1.0
Exports of goods and services
5.1
NEGL
Imports of goods and services
1.0
3.5
Net foreign demand
1.0
-0.6
Before the imposition of an austerity program in
France, we expected real GNP growth to amount to
2.5 percent-the highest rate for any major West
European country. The new program, however, could
pull GNP growth down to 1 percent (see table 9).
Mitterrand's package includes a four-month freeze on
wages and most prices, a ceiling on the budget deficit
at 3 percent of GNP, and a reduction of the deficits of
the separately funded social security and unemploy-
ment programs. Recent evidence, however, suggests
that the economic recovery has stalled. The June
INSEE survey of business intentions found produc-
tion leveling off in the capital equipment industry,
falling in the intermediate goods sector, and continu-
ing to grow only in the consumption goods sector. We
expect household consumption to grow by 1.5 percent
while fixed investment falls by 2.1 percent. On the
other hand, public consumption probably will rise by
around 3 percent, 0.7 percentage point faster than in
1981. Public-sector spending will contribute to faster
import growth. The respected French-based Banque
de Paris et des Pays-bas warned that export prospects
were diminishing because of continued weak demand
in Western Europe and financial problems facing
OPEC and a number of East European countries.
With imports picking up and exports flat, net foreign
demand will decline.
Government consumption
Fixed investment
Additions to inventory
Total domestic demand
Exports of goods and services
Imports of goods and services
Net foreign demand
0.3
1.0
-7.6
1.0
-1.8
NEGL
-1.2
2.4
-1.3 b
1.1
-1.9 b
5.3
-0.6 b
-2.0
a Projected.
b Estimated. No official data are available because of the civil service
strike.
In the United Kingdom real GNP is expected to grow
by 1.1 percent, the first yearly increase since 1979 (see
table 10). This extremely modest growth will come
from widespread improvement in the components of
GNP, but the recovery will still be hesitant. Private
consumption will remain almost flat because of con-
tinued high unemployment-around 3 million-and
prospects for little, if any, increase in real income. A
number of observers expect real disposable income to
fall for the second consecutive year by about
2 percent. Investment prospects have improved con-
siderably despite continuing high interest rates; fixed
investment is expected to rise 1 percent after a nearly
8-percent decline in 1981. Real public consumption
may be up slightly this year after remaining flat in
1981. The political threat posed by the Social
Democratic/ Liberal alliance and mounting pressures
from within the Conservative Party to do something
about the unemployment problem, however, could
well prompt the Thatcher government to raise spend-
The Italian economy will show a weak recovery,
growing by about 1.5 percent (see table 11). The
major impetus will come from exports, which are
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Table 11
Italy: GNP Growth
Percent
-0.2
1.5
0.2
1.3
Government consumption
1.8
1.5
Fixed investment
-0.2
NEGL
Additions to inventory
-3.0
-0.4
Total domestic demand
-2.7
0.6
Exports of goods and services
6.0
6.0
Imports of goods and services
-5.4
3.5
Net foreign demand
2.6
0.5
expected to increase by 6 percent in real terms and far
outpace the modest 3.5-percent rise in imports. Do-
mestic demand will remain weak throughout most of
1982. The Bank of Italy will likely hold to its tight
policies, given the large projected public-sector deficit
for 1982 and the sizable current account deficit.
Continued high real interest rates, along with high tax
rates and uncertainties over employment, will proba-
bly hold the growth in household consumption to 1.3
percent. Tight credit will dampen fixed capital forma-
tion and stockbuilding; we expect total fixed invest-
ment to remain flat this year, and some observers
believe capital outlays may drop by more than
5 percent. The growth in public spending on goods
and services may slow this year because of severe
budgetary problems.
Mirroring the economic situation in the United
States, Canadian GNP growth will decline this year
by 2.9 percent (see table 12). Much of the recent
decline in economic activity can be attributed to
Ottawa's restrictive monetary and fiscal policies and
weak economic conditions in the United States. The
federal budget for 1982-designed to reduce the
deficit and restructure the tax system-includes tax
increases affecting both businesses and households.
Meanwhile, monetary policies have remained tight;
Table 12
Canada: GNP Growth
Government consumption
2.0
2.4
Fixed investment
5.9
-13.8
Additions to inventory
1.1
-1.1
Total domestic demand
3.6
-3.5
Exports of goods and services
1.4
-3.9
Imports of goods and services
3.1
-11.2
Net foreign demand
-0.5
-1.2
earlier this year they forced real interest rates to near-
record levels. As a result of these restrictive policies
and continuing pessimism over short-term economic
prospects, fixed investment-particularly residential
construction-has plummeted. For the year, fixed
investment may be down almost 14 percent. House-
hold consumption is expected to decline slightly as a
result of the squeeze on real disposable incomes from
government-mandated energy price increases and
higher personal taxes. Ottawa's expanding budget
deficit, added to the ballooning provincial budgets,
will boost government consumption at a faster pace
than in 1981.
For the 17 smaller OECD countries, whose economies
did not decline as much as the larger countries, we
expect modest improvement in 1982. The decline in
oil prices will give most of these countries a significant
stimulus. However, in several countries, including
Belgium and Portugal, government efforts to control
budget deficits through reduced growth in public
spending will dampen growth of domestic demand
and, in turn, real GNP. Only Iceland is expected to
record a decline in real GNP in 1982.
25X1
2
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Appendix C
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Figure 1
OECD: Real GNP Growths
6 6
4
2
0
6
4
2
0
8 8
6 6
4 4
2
0
6
4
0
1961-69 71-80 71-73 74-75 76-80
aAnnual data come from OECD Economic Outlook, December 1981.
bAverage annual.
586705 6-82
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Figure 2
OECD: Inflation Rate'
15
10
15
10
5
5 5
0 1965-69 70-73 74-75 76-79 80 0 1965-69 70-73 74-75 76-79 80
aAnnual data come from OECD Economic Outlook, December 1981.
bAverage annual.
586706 6-82
23 Confidential
15 15
10 10
5
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Figure 3
Big Seven: Unemployment Ratesa
6 6
4 4
2
8 g
6
4
2 2
1965-69 70-73 74-75 76-79 80
aAnnual data come from OECD Economic Outlook, December 1981.
bAverage annual.
In
586707
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Figure 4
OECD: Current Account Balancesa
-5
-10
-15
1965-69b 70-73b 74-75b 76-79b 80
aAnnual data come from OECD Economic Outlook, December 1981.
bAverage annual.
-5
-10
-15
586708 6-82
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