Global Chill

Pessimism is contagious. And right now, all the industrialized world seems to have caught the gloom.

A nascent summer rebound in the U. S. economy stalled as companies slashed payrolls. Now, Germany and Japan foresee little economic growth in the second half. Britain's recovery hopes are dimming as housing repossessions by banks reach new highs. France is sliding downward, and in Canada, signs of strength are nearly invisible. As Nancy R. Lazar, economist at International Strategy & Investment Group Inc., puts it: "At the moment, it's hard to find an engine of growth anywhere in the world."

What's going on? In two words, tight money. Inflation-fighting central banks in Germany and Japan have pushed up interest rates, squeezing growth. The Germans are firm in their high-interest-rate stance for now. But with the world economy weakening, central bankers, first in the U. S. and Canada, more recently in Japan, are starting to reverse course and show a "bias toward further monetary easing and lower interest rates," says William P. Sterling, manager of international economics at Merrill Lynch & Co. Trouble is, that change in course won't help soon. At best, the industrialized world may eke out 1% to 2% growth next year.

That's bad news for U. S. businesses, which have been counting on exports to plug the hole in domestic demand. And with all the industrialized countries having become more dependent on foreign trade over the past 10 years (chart), a slowdown these days comes without borders. "A lot of the current country forecasts are counting on an acceleration in exports to boost growth," frets Richard Freeman, chief economist at Imperial Chemical Industries PLC, the mammoth British chemical company. "I can't see where in hell the export surge is going to come from."

PROTECTIONIST PATH. The upshot: With almost every industrialized nation's economy weakening and the former Soviet empire's economies crumbling fast, a full-scale global recession becomes a risk. And if economies don't bounce back soon, politicians may begin erecting trade barriers -- just as they did early in the Great Depression. "In a stagnant world economy, protectionism in a variety of forms is a major economic risk," says Gail Fosler, chief economist at the Conference Board. Protectionism could lead to a global contraction.

Bright spots exist, no question. Mexico has been expanding at a 4.5% rate this year. Latin America as a whole could grow 5% in 1992. The Asia-Pacific area, excluding Japan, should still manage a healthy 6% pace next year. Just the same, none of these areas has the heft to get the world economy moving again, says Eric Taze-Bernard, senior economist at Banque Indosuez in Paris.

The global economy is in a much tougher spot than many expected only a few months ago. Slowing growth in Germany and Japan was supposed to be offset by a sustained recovery in the U. S., Canada, and Britain, all of which went into recession much earlier. Overall, the world economy should have chugged merrily along as different countries went in and out of their business cycles at different times.

But the recoveries in the English-speaking world have turned out to be much weaker than expected, while the downturns in Europe and Japan may very well be deeper. The German engine of growth is wheezing: The economy is expected to grow at a 3.3% rate for all of 1991, but only 1.8% next year, according to Hans-Jurgen Meltzer, economist at Deutsche Bank in Frankfurt.

Right now, German output may actually be falling as the economy stumbles under the burden of high interest rates, slowing exports, and the huge costs of reunification. Recent union wage settlements, such as the 6.7% increase negotiated by Volkswagen's employees and the 8% gain for brewery workers, have raised fears of a wage-price spiral. Germany's central bankers seem set to keep interest rates up until inflation comes down from its expected peak of 5% early next year.

PROFIT SQUEEZE. With other European countries yoked to Germany's monetary policy, they are being forced to keep their interest rates high as well. France, for example, tried to stimulate its moribund economy by cutting interest rates on Oct. 18. A month later, after the French franc plummeted against the German mark, it was forced to raise rates once again. Britain, too, is being faced with the unpleasant prospect of raising interest rates, even though unemployment is at 8.7% and still rising. Many smaller European countries are hurting, too.

While Europe slows down, so does Japan. The stock market is down 4.9% since last January. Corporate bankruptcies are at record levels, banks are pulling back, and third-quarter pretax profits are down 12% compared with a year ago. Since July, the economy actually may have contracted, estimates Tetsuo Tsukimura, chief economist at Smith Barney, Harris Upham International Inc. in Tokyo. Many economists expect 2% growth or less in 1992.

Sluggish growth overseas is darkening the U. S. outlook. Without export growth, the gross domestic product would have declined by 1.7% over the past year, almost twice its actual 0.9% drop. That export support now figures to wane in coming months, especially as Canada and Europe, which take about half of U. S. exports, slow. The global slowdown may drag down corporate profits next year, since more than a fifth of profits flow from operations abroad.

And as economies slump further, the risk grows that each nation or regional trading bloc will try to boost exports at another's expense. Over the past six months, real imports to the U. S. have surged at an annual rate of 18%, raising suspicions that some foreign companies are boosting shipments into the U. S. to offset weakness at home. "Japan is becoming far more export-aggressive," says Roger Kubarych, manager at Henry Kaufman & Co. Since May, Japan's monthly trade surplus with the U. S. has grown by 72%.

To spur their economies and defuse protectionist pressures, many central bankers have already begun encouraging lower rates. And most have room to ease further as inflation heads lower. Since January, the Federal Reserve has cut short-term rates by a third, and Canada's central bank has also slashed rates since mid-1990. The Bank of Japan recently relaxed monetary policy, and further easing lies ahead. The Germans, ever fearful of inflation, will be last. But if prices don't flare up, they should soften their tight-money stance soon. Lower interest rates won't be in vain. With a little luck, world growth will kick into gear sometime later in the year. But around the gloomy globe, the coming winter is looking rather chilly.

Before it's here, it's on the Bloomberg Terminal.