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HERE COMES A GLOBAL SLOWDOWN
"I really am displeased," complains Japanese Finance Minister Ryutaro Hashimoto. No wonder. Since the final days of the gulf war, the dollar has spurted 9% against the yen and 17% against the German mark. To currency traders, the estimated $50 billion that has poured into the greenback is America's reward for global leadership and a sign that the U. S. is emerging from recession. But Hashimoto is far less sanguine. "I am greatly concerned," he says, that the dollar's rise "will not be good for the world economy."
All of a sudden, the Finance Minister has a lot of company. With the Conference Board's first post-gulf-war survey of consumer confidence registering its biggest monthly jump ever (page 19), the U. S. may indeed be on the way up. But the rest of the world is increasingly headed in the opposite direction (charts). All told, the West will probably eke out a growth rate of 1.5% this year, estimates Morgan Stanley & Co. Senior Economist Robert S. Gay.
Even that may be optimistic. By early next year, anemic overseas demand and the higher dollar could begin to depress U. S. exports--one of America's few remaining growth areas. If that happens, any U. S. recovery could quickly peter out after a quarter or two, leaving the entire industrial world mired in gloom. "If exports suffer," argues Cyrus H. Tahmassebi, chief economist at Ashland Oil Inc., "the U. S. recession will be longer and more severe than we originally thought."
BAD HEADACHE. Amid such predictions, Treasury Under Secretary David C. Mulford is quick to admit that the Administration, too, is "concerned about the rapidity of the dollar's rise." Indeed, a higher currency and slower growth overseas are already giving some U. S. multinationals a bad headache. IBM recently blamed nose-diving first-quarter profits on "faltering economies in most of the world," and auto parts maker Eaton Corp. notes that its British factories are also suffering from weak overseas demand. In fact, look just about anywhere outside the U. S. right now and you'll see signs of deep-seated economic stress.
Australia, Britain, and Canada, for example, have been in recession for months. France, Italy, and Spain are on the brink. Once-booming Germany is slowing to a crawl as reunification costs spiral out of control. Even Japan seems headed for a substantial cooldown after 52 months of robust expansion.
Japanese consumer spending is weakening, and corporate profits are expected to have declined 0.8% in the fiscal year ended Mar. 31, the first drop in four years. And although the Bank of Japan soon may ease its tight-money stand by cutting interest rates as much as half a percentage point, that probably won't do much for growth. The central bank recently estimated that capital spending, which accounted for 60% of the growth in Japanese gross national product over the past three years, may rise a mere 1.1% in 1991. But many big manufacturers, including Nissan Motor, Oji Paper, and Ricoh, are slashing outlays. While the higher dollar should give Japanese exports a boost, that will not be enough to counter the drop in demand at home.
Despite the dim outlook, most economists believe Japan still will escape recession. They are less certain about Germany. Indeed, to Morgan Stanley's Gay and many others, "Germany is the story." Recently seen as Europe's last hope for growth, Germany seems increasingly adrift amid high interest rates, rising taxes, and huge reunification costs. As long as Germany lags, all of Europe seems doomed to "almost no growth" this year, says Peter Praet, chief economist at Belgium's Generale Bank.
Pessimism is fast becoming a national pastime for many German politicians and economists. The $75 billion that Bonn expects to spend this year on aid to eastern Germany, plus $6.6 billion more in gulf war contributions, will leave Chancellor Helmut Kohl's conservatives with a $75 billion budget deficit. Double last year's figure, the deficit is expected to amount to nearly 5% of GNP.
FEW BUYERS. But even amid such fiscal stimulus, demand is slumping. Exports, which account for a third of the German economy, have begun to sag, with overseas machinery orders off 13% last year. And real wages in western Germany will rise only about 3.5% this year, says the Economics Ministry, a third of last year's gain. Partly as a result, Commerzbank Chief Economist Ulrich Ramm thinks growth in consumer spending likely will fall to 2.5% this year, from 4.4% in 1990. "Very few people are buying now," complains Karl Hennig, owner of Hamburg's Zen art gallery. "Business has become quite slow."
If western Germany is complaining about a slowdown, eastern Germany is experiencing utter breakdown. With the number of citizens on welfare soaring past 1.5 million, tens of thousands have taken to the streets in major industrial cities calling for more jobs and money--and for Kohl to step down. Indeed, Kohl has been in political hot water all across unified Germany ever since he rammed through $40 billion in new taxes and other levies to help pay for the gulf bill and reconstruction of the east.
Kohl's new taxes and the mark's decline together may add more than a percentage point to the rise in consumer prices this year. And other inflationary forces are building even as the economy slows. For example, despite low productivity, eastern Germany's unionized steelworkers have won wage parity by 1994 with their more efficient western counterparts, signaling that other high-priced labor deals may be in the works. And Germany's money supply has been mushrooming.
Faced with such pressures, Bundesbank President Karl Otto Pohl is reluctant to cut interest rates to spur growth. But he may have no choice if growth keeps slowing. With yields on three-month certificates of deposit now at 9.1% and consumers paying 14% on loans, "interest rates are just about hitting the pain threshold," says Commerzbank's Ramm.
While the German economy sputters, some of its neighbors are flaming out. Take France, where some 2.6 million, or 9.2% of the work force, are jobless. The Bank of France has cut interest rates recently, but the stimulus may be too late to have much of an impact. Corporate failures have already reached record highs, with 4,809 companies in receivership or bankruptcy in February, up 25% from 1990's monthly average.
'DIFFICULT.' Many of those still operating are taking a beating. On Mar. 27, for instance, computer maker Groupe Bull posted a loss of $1.2 billion for 1990, with little improvement in sight. Only one day earlier, auto maker Renault announced it earned only $211 million last year, down 86% from 1989. This year, Managing Director Louis Schweitzer observes, "will also be difficult."
Across most of the industrial world, 1991 promises to be difficult. To foreign-exchange traders, the dollar's sharp ascent is a comforting signal that life promises to be a lot tougher overseas than in the U. S. But it won't take much to prove that assessment wrong. This year could turn out to be pretty grim for everyone.William Glasgall, with Christopher Farrell in New York, Blanca Riemer in Paris, Igor Reichlin in Bonn, and Karen Lowry Miller in Tokyo