Briefing Book for Secretary Simon--Growth, Inflation, and Trade Problems of Major Developed Countries

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80M01389R000400060001-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 43
• Document Creation Date: December 9, 2016
• Document Release Date: March 13, 2000
• Sequence Number: 1
• Publication Date: March 7, 1975
• Content Type: BRIEF

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Briefing Book for Secretary Simon
Growth, Inflation, and Trade Problems
of Major Developed Countries
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Page
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
ECONOMIC GROWTH
Developed Countries: Industrial Slump Accelerates . . . . . . . . . . . . . 1
(12 February 1975)
Developed Countries: The Slump in Perspective . . . . . . . . . . . . . . 4
(5 February 1975)
Developed Countries: Oil Crisis and Economic Growth . . . . . . . . . . . 7
(29 January 1975)
Developed Countries: Excess Capacity Becomes a Problem . . . . . . . . . 11
(22 January 1975)
Developed Countries: Shambles in Housing Construction . . . . . . . . . 13
(15 January 1975)
Developed Countries: Overhang of Inventories . . . . . . . . . . . . . . 16
(15 January 1975)
Developed Countries: No Cheer in Investment Indicators . . . . . . . . . 19
(26 December 1974)
Developed Countries: Inflation Bulletin . . . . . . . . . . . . . . . . . 22
(26 February 1975)
Developed Countries: Oil Prices and Inflation . . . . . . . . . . . . . . 25
(29 January 1975)
Indexing for Inflation . . . . . . . . . . . . . . . . . . . . . . . . 28
(8 January 1975)
OECD Countries: Shifting Trade Balances . . . . . . . . . . . . . . . . 31
(26 February 1975)
Developed Countries: Trade Impact of Oil Price Rise . . . . . . . . . . . 37
(22 January 1975)
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The major developed countries are experiencing their sharpest economic
contraction in postwar history. For the seven countries as a group -- Canada,
France, Italy, Japan, the United States, the United Kingdom, and West Germany --
real gross national product declined at an annual rate of 2.1% in the first half of
1974 and another 1.7% in the second half. Most economic indicators suggest that
the slump, already seven quarters long, will not bottom out before mid-1975. For
the year as a whole, we expect that the major foreign economies will register only
a slight gain in real GNP - 1% or less.
No signs of recovery have yet emerged. The retrenchment in business
investment is continuing in response to a profit squeeze evident in all major
industries and a rapid buildup of idle plant capacity. Faced with exceptionally
weak demand and huge inventories, firms have accelerated production cutbacks.
During the last quarter of 1974, industrial output fell at a 22% annual rate --
a postwar record. The January decline was at least as severe. Because demand has
sagged even more than output, inventories have continued to grow, pointing to
further production cuts in the months ahead.
Unemployment, after rising slowly through most of 1974. accelerated sharply
in the fall. The seasonally adjusted jobless rate has hit 7% in Canada; nearly 4%
in West Germany, France, and Britain; and a postwar high of 2% in Japan. In
addition, a growing number of workers have been put on short work hours. The
recession has also sparked a rash of business failures, particularly in Japan and
West Germany. Although the bankruptcy rate probably will remain high in early
1975, governments almost certainly will keep key firms from going under.
Despite poor economic prospects, major foreign countries remain reluctant
to initiate stimulative measures. The rise in West Germany's federal deficit this
year, to an estimated $13 billion, largely reflects a recession-induced decline in
revenues rather than new spending programs. Tokyo has concentrated on programs
aimed at cushioning the downturn, postponing any major stimulative action until
after this spring's wage settlements. Although pressures for expansionary measures
are mounting, serious inflation and payments problems limit the action that the
United Kingdom and Italy can take. France and Canada are also reluctant to move
quickly.
On the inflation front, weak demand has helped slow the three-year-old price
spiral in major developed countries. Except in the United Kingdom, the rise in
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wholesale prices has nearly halted as firms have been forced to absorb cost increases
stemming primarily from record wage settlements. The rise in consumer prices has
also eased in recent months, to a still unacceptably high annual rate of 12%.
Consumer price inflation in all major economies now reflects mainly rising costs
for food and services. Although world food prices have eased considerably in recent
weeks, the impact at the retail level will not be felt for several months -- and
then only if the decline continues.
The major industrial countries are still feeling the impact of higher oil import
costs on their trade positions. For the group as a whole, the oil deficit in 1974
increased by about $50 billion, reaching nearly $76 billion. Major shifts in balances
in non-oil trade resulted in an uneven distribution of the payments burden among
individual countries. Only the Big Three -- West Germany, Japan, and the United
States - were able to offset most or all of the increase by boosting their non-oil
trade surplus. West Germany did particularly well, increasing its total surplus by
$8 billion.
Italy and the United Kingdom experienced a serious deterioration in their
trade and payments positions. Britain's trade deficit was a massive $12.3 billion
last year, reflecting a $6 billion jump in oil payments and a further rise in the
large non-oil deficit. Italy racked up a $7.7 billion deficit. Because of its ;poor
credit rating, Rome required bail-out assistance from West Germany and the
European Community totaling $4 billion.
This pattern is likely to be repeated in 1975 because demand in the Brig Three
is expected to remain weak. Japan and West Germany probably will boost their
surpluses, perhaps considerably. France should reduce its trade deficit from the
$3.4 billion incurred last year and avoid serious payments difficulties. The United
Kingdom and Italy, on the other hand, will encounter continuing financing
problems. Both countries will require funds from recycling schemes to get by
without imposing import controls or harsher austerity measures.
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DEVELOPED COUNTRIES:
INDUSTRIAL SLUMP
ACCELERATES
DEVELOPED COUNTRIES:
Trends in Industrial Production 1
(seasonally adjusted)
Industrial production in the major
countries has dropped in recent months
at the sharpest rate since World War II.
Output in the Big Seven has fallen
steadily since May, after marking time
for five months at the reduced level
brought on by the oil embargo. The 110
annual rate of decline accelerated to
17% in October-November; fragmen- 105
tary information points to an even
steeper descent in December-January.
Output almost certainly has fallen 100
below the level of two years ago.
Breakdown, by Country and Sector
J F M A M J J A S 0 N D J F M A M J J A S 0 N
1973 1974
The timing and severity of the 15
industrial decline in the six foreign
countries is as follows:
Japan : Production slipped
throughout 1974, with the 5
annual rate of decline
reaching 18% in June- 0
November and 35% in De-
cember.
Italy : After rebounding to
an all-time high in June, out- -10
put fell at an annual rate of
30% in the second half of _15
1974, to the early-1973
level.
France: Production climbed
through August, then de-
clined thereafter at a 25%
annual rate.
Percentage change
over previous month
at an annual rate
'Canada, France, Italy, Japan, United Kingdom,
United States and West Germany.
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DEVELOPED COUNTRIES:
Percentage Change in Industrial Production, Nov 1974 over May 1974
(seasonally adjusted data, at an annual rate)
United West United
Canada France Italy Japan Kingdom Germany States
~=M
-4
-11
1 4
AUTOMOBILES
NA.
6 MSA
17
4
-3
ELECTRICAL
MACHINERY
NON-
ELECTRICAL
MACHINERY
M NA.
6
-15 -10 -13
Negl. M
13
-16
Negl. 4
N.A.
-5 11 -3
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West Germany: After stagnating for a year, output declined at an annual
rate of 10% in June-September and an estimated 20% in
October-November; mass industrial layoffs continued through
December-January.
Canada: Since peaking in March, industrial activity has slipped at an
annual rate of 7%.
United Kingdom: Output plummeted during last winter's coal strike,
rebounded to the prestrike level by August, and then began to sag; output
is now roughly 3% below the prestrike rate.
Most major industries have been caught in the downward spiral. In
June-November, automobile production dropped precipitously in all countries
except France and Canada. West German output showed a 25% rate of decline, the
sharpest in the Big Seven. The decline in the Japanese automotive industry
amounted to only 6%, because a rapid buildup in inventories offset much of the
drop in sales. Chemical production slumped in nearly all countries, with the drop
most pronounced in West Germany. Japan led in the falloff in textiles, machinery
production, and steel output.
The short-term outlook for industrial output is poor. Despite recent cuts in
production, inventories remain high and will .retard recovery. Moreover,
demand-both domestic and foreign-is expected to be weak for several more
months. While the decline in industrial activity probably will bottom out by
midyear, output almost certainly will be lower in the first half of 1975 than in the
second half of 1974.
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DEVELOPED COUNTRIES: THE SLUMP IN PERSPECTIVE
The economic contraction in the major developed countries, already seven
quarters long, is the sharpest since World War II.
Composite GNP in the Big Six foreign economies fell from a level 2-1/2
percentage points above the long-term trend in early 1973 to 5 percentage points
below trend by the end of 1974. This change is two to three times the drop
in comparable periods of the two previous postwar contractions.
So far, the contraction has been most severe in Japan and mildest in Italy.
Japan: The deviation of GNP from the long-term trend has moved from
plus 5 percentage points to minus 9 percentage points - an
unprecedented post-WWII decline for a major country.
United Kingdom: The contraction already exceeds the declines of the
past two slumps.
West Germany: The falloff in growth has now reached the magnitude
of the 1966-67 recession.
Canada: In the last three quarters of 1974, the economy sagged as badly
as in the seven-quarter recession in 1969-70.
France: In a country noted for steady economic expansion, GNP had
slipped 2 percentage points below the trend by late 1974.
Italy: The slump, under way for only three quarters, still is shallow
compared with the recession of 1969-72.
The severity of the slump results largely from two factors: (a) the
simultaneous beginning of the contraction in several countries, which caused foreign
as well as domestic demand to weaken, and (b) oil price hikes and supply squeezes
over the past 16 months, which have depressed GNP both directly and indirectly.
The recession has several quarters to go, to judge from the length of the
two previous slumps and from the special circumstances of the current slowdown.
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DEVELOPED COUNTRIES:
Percent Deviations of Real GNP Value from the Long-Term Trend1
Canada
Contraction Period
7
/
.
_
I
ME
I
_
'
7
ux.
-5 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
The long-term trend is a 25-quarter moving average of seasonally adjusted GNP values at constant prices. Trend values for
1972-74 were obtained by extrapolating the growth rate indicated by the moving averages for 1970-71.
7
Annual
Rate of Growth
in Long-Term Trend
1963-74
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Oil prices will remain high, lengthening the period of weak demand and placing
unprecedented burdens on national and international financial institutions.
Governments have been, and will continue to be, slower than usual to react to
the slump because of preoccupation with inflation and balance-of-payments
problems. Expansion programs, even when adopted, will not be fully felt for a half
year or so.
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DEVELOPED COUNTRIES: OIL CRISIS AND ECONOMIC GROWTH*
The oil price hike has simultaneously contracted demand and inflated prices
in the industrial world. It played a major role in the sharp drop in industrial output
and business confidence in 1974. Its effects -- particularly on trade balances and
money markets - darken prospects for an economic rebound in 1975.
The cuts in OPEC oil production in late 1973 and the breathtaking rise in
oil prices dealt the major industrial economies an unprecedented external shock.
The shock was exceptionally severe because it came roughly six months after the
major countries, in near unison, had adopted more restrictive policies to slow their
overheated economies. As a result, instead of the planned soft landing, the real
annual rate of growth for the six major foreign economies plunged from 9.1%
in the first half of 1973 to a negative 0.9% in the first half of 1974. GNP remained
in this depressed state through the end of the year, showing practically no growth
in the second half over the first. If the United States is included, GNP growth
slumped from 8.2% in the first half of 1973 to a negative 2.1% in the first half
of 1974 and a negative 1.7% in the second half.
Business and consumer confidence continued to slide; inventories mounted.
Real investment in the six major foreign countries fell off at an annual rate of
11.5% in the first half of 1974 and at an estimated 3.6% in the second half. Growth
in private consumption was near zero in the first half of 1974 and recovered only
slightly thereafter. Final domestic demand for the year as a whole declined at
a rate of 0.2%.
Industrial output in the six major foreign countries weakened progressively
throughout 1974. Their combined monthly output had fallen below the year-earlier
level by August and has since continued to sag. In November, output was down
by an estimated 7%. Japan and West Germany -- the two largest foreign
economies -- showed declines of 13% and 7%, respectively.
s This article does not attempt to quantify the growth impact of higher oil prices as distinct from other
factors in the world economic slowdown. Such an assessment would depend heavily on assumptions concerning
values and lags of various multipliers - the reliability of which would be questionable, given recent radical
changes in the world economy.
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DEVELOPED COUNTRIES: Changes in Real GNP
Percent Change over Previous Period; Semiannual Data at Annual Rates, Seasonally Adjusters
727171.7
0.5 2.0
UNITED KINGDOM
9.5
1973 1974
ANNUAL
-3.0
1973 1974
I II I II
SEMIANNUAL
1973 1974
ANNUAL
-1.7
1973 1974
I II I II
SEMIANNUAL
565053 1-75
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Unemployment in these countries as a group rose 40% during 1974. The
number of unemployed in West Germany about doubled, to nearly 1 million
workers. In Japan, the policy of providing lifetime jobs limited the rise in
unemployment to 8% until December, when layoffs spurted. The United Kingdom,
France, Italy, and Canada experienced rises in unemployment of between 15%
and 35%.
Among the industrialized countries, Japan suffered the sharpest decline in GNP
last year. Total output dropped at an 8.8% annual rate in the first half, improving
by a meager 1.3% in the second half. Both consumption and fixed investment
fell sharply, pulling down final domestic demand by 5.0% for the year. The GNP
slump would have been even worse had inventories not been allowed to mount.
With inflation still running at 20%, Tokyo has held to the restrictive policies that
are exacerbating the contractionary effects of the oil price hike.
The United Kingdom suffered a 0.6% drop in GNP for 1974, after the 5.3%
gain of 1973. Because of a prolonged coal strike and the oil crisis, growth at an
annual. rate was a negative 3.0% in the first half of 1974 on top of a decline
in the second half of the preceding year. GNP recovered at an estimated 3.9%
annual rate during July-December 1974; its value nevertheless remained slightly
below that reached in the first half of 1973.
West
United
United
Total Ex-
cluding
the United
Japan
Germany
France
Italy
Kingdom
Canada
States
Total
States
Private consumption
-0.3
-0
4.0
4.0
-0.3
5.5
-2.2
-0.3
1.5
Government purchases
of goods and services
-8.6
3.4
3.6
1.6
2.0
6.7
1.0
0.6
0.2
Gross fixed investment
-11.4
-6.5
3.3
4.7
-5.5
8.4
-7.2
-6.0
-4.8
Plant and equipment
-10.5
-8.1
4.7
9.9
0.7
11.1
-0.3
-2.1
-3.8
Construction
-13.5
-5.2
0.6
1.6
-29.9
2.1
-27.1
-16.4
-6.5
Final domestic demand
-5.0
-1.0
3.8
3.6
-0.3
6.3
-2.4
-1.3
-0.2
Exports of goods and
services
18.7
14.0
7.0
4.2
5.1
-1.3
7.5
8.6
9.6
Imports of goods and
services
10.7
5.2
5.5
0.4
1.1
10.5
1.0
3.3
5.5
Net foreign balancel
0.9
2.3
0.4
0.9
0.8
-3.1
0.5
0.7
0.8
Stockbuildingl
0.6
-0.9
-0.3
-0.3
-1.1
0.4
-0.3
-0.3
-0.3
GNP
-3.5
0.4
3.9
4.0
-0.6
3.6
-2.2
-0.8
0.4
1. Ckianges in the net foreign balance and the rate of stockbuilding are expressed as a percent of previous period's GNP, presented at an annual
rate.
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Thanks solely to moderate increases in government spending and in net foreign
demand, West Germany managed to keep output at the 1973 level. Growth slipped
from 5.3% in 1973 -- attributable to a banner first half -- to 0.4% last year. A
dramatic falloff in business investment and continued apathy among consumers
plagued the economy throughout the year. Because a drop in export demand added
to the domestic slump in the second half, GNP fell by 2.8% during July-December.
When the oil crisis hit, the Italian economy was recuperating from an economic
slowdown caused by business malaise and massive strikes. Despite still-strong
domestic demand, growth plummeted from an annual rate of 9.4% in the second
half of 1973 to 3.2% in the first half of 1974. An austerity program, induced
by severe balance-of-payments problems, dropped the growth rate to near zero
in the second half of the year.
France's growth rate actually rose in the first half of 1974 because of strong
consumer demand and still buoyant investment. Growth slumped from 4.5% to
an estimated 1.0% in the second half, however, as investment plunged in reaction
to harsh government taxes and restraints on business and as demand for French
exports slumped.
As a net exporter of oil, Canada at first benefited from the sharp hike in
oil prices. GNP growth increased to 5.7% in the first half of 1974, compared with
4.4% in the second half of 1973. During July-December, however, housing
investment fell precipitously in the wake of a jump in interest rates, and exports
were hurt by weak US demand. Growth dropped to an estimated annual rate of
negative 1.7%.
Prospects for substantial growth in 1975 are dim. Continued weak demand
for investment goods, depressed export markets, and a large overhang of inventories
will hobble recovery. Private consumption and government spending will be the
major strong points. On balance, the six foreign economies should show a growth
of less than 1% for the year as a whole. Most of this growth will occur after
midyear.
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 D~VE~L~'I~~[~~(R*!REt L EIS ~7AN DR$ ~>~ ~~~P44 R ~~7
The continued rapid buildup of idle industrial capacity in major developed
countries bodes ill for an early revival in capital spending.
Still at low levels in early 1974, surplus capacity developed rapidly after
midyear, when industrial output began falling. By yearend, excess capacity* in
most of the countries was near or beyond the highest level reached in any recession
of the previous 20 years.
? Japanese industry has the largest amount of slack, with output (seasonally
adjusted) running 20% below capacity.
? Italian industry is operating nearly 15% below capacity.
? West German production is running an estimated 10%-15% below
potential, about as much as in the 1967 slump.
? British output is roughly 10% below capacity -- little better than in early
1974, when industry was on a short workweek.
? In France and Canada, where industrial output has held up comparatively
well, 5%-10% of capacity is idle.
The auto industries have the most slack, operating 30%-40% below capacity
in most countries. Capacity utilization has declined sharply in the textile industries,
because of the 10%-15% drop in output over the past year. Basic industries,
operating near capacity six months ago, have also begun to develop considerable
slack. In the ferrous and nonferrous metals industries, for example, utilization rates
had fallen well below normal by late 1974.
With the growth in unused capacity, industrial expansion programs are being
pruned. The falloff in new orders for machinery and equipment, evident through
the first three quarters of 1974, apparently accelerated in the fourth. Numerous
surveys of planned investment point to further cuts in capital spending over the
next few quarters. Industrial investment thus promises to remain a drag on economic
recovery in 1975.
* We have estimated the trend in productive capacity by linear extrapolation through two postwar cyclical
peaks in industrial production. This procedure yields a conservative estimate of capacity levels because some
branches were not producing at full potential when the industrial sector as a whole reached its peak.
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DEVELOPED COUNTRIES: 120
INDUSTRIAL CAPACITY
AND
OUTPUT TRENDS
INDEX 1970 ANNUAL AVERAGE = 100
SEASONALLY ADJUSTED
90 g..,..,
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DEVELOPED COUNTRIES: SHAMBLES IN HOUSING CONSTRUCTION
Housing construction in major developed countries is experiencing one of its
sharpest downturns in 30 years and faces continuing hard times in 1975.
Housing starts began to fall off in several countries in 1973 because of
overbuilding and rising construction costs. The problem deepened in 1974 when
costs rose further and tight money kept many consumers and builders out of the
market. Japan, West Germany, the United Kingdom, and the United States have
been the hardest hit so far.
Country Situations
Housing starts in Japan were down 36% in the second quarter of 1974 from
a year earlier and picked up only slightly in the third quarter. Although dismissals
of workers have been limited by the Japanese policy of providing lifetime jobs,
unemployment has increased considerably faster in construction than in other
sectors.
The West German housing construction industry, long accustomed to boom
conditions, has slipped badly since late 1973. Housing starts were off 41% by the
first quarter of 1974 and have remained far below 1973 levels. A shift of
construction workers to nonresidential projects held unemployment in construction
in the third quarter to 6.7%, or five times the year-earlier level.
In the United Kingdom, housing starts dropped by about one-fourth in 1974.
Mortgage rates of 14% - 14-1/2% were a major factor in the decline. Unemployment
in the construction industry has been running at 14%, accounting for one-fifth
of the national total.
France is the one major country in which residential building has held up
well. The industry has benefited from government housing subsidies and, until
recently, the economy's strong performance. Employment has been propped up
by public works projects.
In Italy, housing construction began to drop in 1974 after a generally strong
showing the previous year. Housing starts dropped by 9% in the second quarter,
compared with the same quarter of 1973 - itself a soft period. The decline has
prompted the Treasury to reduce the discount rate to 8%.
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Developed Coun ries: Trends in esl en is Construction
(Percent)
WEST GERMANY UK
6.4
-24.9 -22.3
FRANCE
12,8 13.0
-20.1 -21.0
-24.1 -26.4
-41.4
11 lit IV I II III I I1 Iii IV I Ii III
1973 1974 1973 1974
-0.6
5.0 6.7
JAPAN US
-5.4 -4.4 -3.8
CANADA
10.6
4,6
-23.6
11 III IV I 11 111
1973 1974
* percent change in housing starts compared with some period in previous year.
ITALY
17.6
11.0 9.2
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Developed Countries
Iriterest,ates farNortgage Money
I 1 I I 1 1 I 1
I II III IV I II III IV I II III
1972 1973 1974
In Canada, housing construction remained brisk until the second quarter of
1974. By September, starts had plummeted 24% from the 1973 level, partly because
of a 2-percentage point rise in mortgage rates.
Even with an easing of credit in 1975, recovery in housing construction will
be impeded by the pinch on real incomes, general economic uncertainty, and prices
that place homes beyond the reach of many families. Even when the job market
improves and the economic climate brightens, a heavy backlog of unsold dwellings
will absorb much of the rise in demand.
15
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The continuing buildup in inventories in major industrial countries, while
softening the slump, poses an obstacle to early recovery.
In each of the five countries for which data are available, the real value of
additions to stocks from the spring of 1973 to the fall of 1974 exceeded the
real increment in GNP -- a rare phenomenon. If it had not been for stock-building,
GNP would have dropped in most of these countries during the last three quarters
of 1973 instead of merely showing a smaller rate of growth. In 1974, the continued
accumulation of stocks moderated the leveling off or decline of GNP experienced
in these countries. By contrast, inventories plummeted in 1958, the last recession
to bring a drop in the aggregrate GNP of the major industrial countries.
In the earlier part of the economic slowdown, firms continued to build stocks
because they expected demand to revive quickly. Moreover, material shortages and
accelerating inflation made stock-building attractive. In 1974, the drop in final
demand was so abrupt that sales slumped even more than output, resulting in an
unplannned increase in stocks.
Japan has had the most pronounced buildup in inventories. In the first nine
months of 1974, $15 billion worth of stocks (at 1973 prices) were added while
GNP was suffering a cumulative loss of $6 billion. Since early 1972, accumulation
of inventories in excess of the historic stock/output norm has totaled about
$35 billion - a figure equal to 8% of annual GNP.
In Canada, inventory accumulation ran at normal levels through 1973.
Stock-building subsequently has accelerated even though the GNP growth rate has
plunged. By September 1974, abnormal accumulations of goods equaled 2%% of
annual GNP.
In West Germany and the United Kingdom, inventory accumulation has been
erratic. Stocks were drawn down in the first quarter of 1974 because of increased
foreign demand for German products and the three-day work week in the United
Kingdom. In the next two quarters, stocks grew rapidly. In September, the excess
accumulation was still less than 1% of GNP in both countries.
The timing and pace of economic recovery in these countries will depend
heavily on how rapidly industry tries to bring stocks back to desired leve',ls. If
business chooses to liquidate stocks before final demand revives, the current
recession will be deepened but recovery will be more rapid once begun. If :firms
hold stocks constant and allow an increase in demand to gradually improve the
stock/output ratio, below-normal stock accumulations will act as a drag on recovery.
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Changes in Stocks and GNP1
Billion 1973 US $ (seasonally adjusted)
I II III IV I II III IV I II III
1972 1973 1974
1 II III IV I II III IV I II III
1972 1973 1974
1 II Ili IV I II III IV I II III
1972 1973 1974
West Germany
J
1 II III IV I II III IV I II III I II III IV I II III IV I II III
1972 1973 1974 1972 1973 1974
1Each graph is scaled according to the relative size of the country's GNP.
564975 1-75
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Cumulative Abnormal Additions to Stocks'
I II III IV I II III IV I II III
1972 1973 1974
0 L_
1 11 III IV I II 111 IV I II III
I II 111 IV I Il III IV I Il III
1972 1973 1974
I II III IV I II III IV I 11 III
1972 1973 19114
NOTE: Defined as the difference between total additions to stocks and the product of
changes in final demand (GNP minus stock changes) and the long-term marginal stock/out ratio.
1Each graph is scaled according to the relative size of the country's GNP.
18
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DEVELOPED COUNTRIES: NO CHEER IN INVESTMENT INDICATORS
Leading indicators point to a further decline in private investment in major
industrial countries over the months ahead. Afflicted with excess capacity and a
profit squeeze, business firms are likely to hold back on capital spending even
if governments soon adopt expansionary measures. Compared with the recent peaks,
real private outlays on plant and equipment are already down 19% in Japan, 12%
in West Germany, and 4% in the United Kingdom.
New orders for machinery and equipment, the most important investment
indicator, declined in the third quarter in four of the five countries for which
data are available.
? Canadian orders fell 10% from the second quarter on a seasonally adjusted
basis, to the lowest level in a year.
? British orders slipped by 3%, after a 15% drop in the first quarter and
a slight increase in the second.
? West German orders declined 4%, the second consecutive quarterly
decline.
? US orders fell about 2%, following a 6% decline in the first quarter and
a 2% increase in the second.
? Japanese orders rose 20% from the previous depressed level.
Scattered data for October indicate that new orders plunged in Japan and that
the downward trend continued in most countries. Surveys of investment plans
suggest that Italian and French orders also have fallen in recent months.
In most countries, orders for non-residential construction stagnated or declined
in the third quarter. The 13% drop in Canada was the steepest among foreign
countries. Orders fell 3% in the United Kingdom, the fourth consecutive quarterly
decline, while Japanese and West German orders remained depressed.
In practically all developed countries, the textile, automobile, and appliance
industries already are operating well below capacity. The steel industry is reluctant
to increase investment because of an expected fall in demand from the high level
of 1974. EC steel producers, for example, plan to cut their outlays by 30% in
1975.
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DEVELOPED COUNTRIES: Leading Investment Indicators
New Private Orders for Machinery and Equipment
Seasonally Ad isted
40
I II
1973
ana
United
States*
1 West
Germany
1 Un
ted Kingdom*
Japan
10
Jul Aug Sep Oct
1
1974
120
C
110
a 100
90
C
r
80
Can
da*
United
States*
United
ingdom*
West G
rmany
N
o, Japan*
Seasonally A
justed
1
1973
1
1974
20
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80
Developed Countries: Real Private Spending on Plant and Equipment
Canada
United Kingdo
West German
United States
Japan
Seasonally A
justed
I
1973
1
1974
Relaxation of monetary policy probably would not spark investment, because
credit no longer appears to be a major constraint. In Japan and apparently in
France as well, commercial bank lending is running below the permitted level. In
any case, a minimum of one-half usually passes before business responds to
policy changes.
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DEVELOPED COUNTRIES: INFLATION BULLETIN
The price spiral in major foreign developed countries, now almost three years
old, shows signs of breaking. Increases in wholesale prices (in terms of seasonally
adjusted, three-month moving averages) plummeted in the last half of 1974 to
nearly zero. The rise in consumer prices eased toward the end of the year -- to
a still unacceptably high annual rate of about 12%. Although recent West German
wage negotiations have resulted in comparatively moderate increases of 7% per
year, generous pay hikes in other major countries continue to be layered the
industrial cost structure.
Wholesale prices seasonally adjusted have declined by 5% in Japan since
October, by 3% in France since September, and by 1% in Canada since November.
In West Germany, Italy, and the United States, prices have been rising at a much
reduced rate over the past several months. Only in the United Kingdom have
wholesale price rises recently accelerated - mainly because price controls were
relaxed.
The break in wholesale prices stems primarily from the fall in demand rather
than a reduction in cost pressures. While wage rates in such countries as Canada,
Italy, and Japan are still increasing at a 20% annual rate, industrial firms are no
longer able to fully pass on the added costs.
The continued rise in consumer prices reflects mainly growing costs for food
and services. On the average, increases in food prices have recently accounted for
almost one-half of the consumer price rise in major foreign economies. Growth
in prices for manufactured goods has slowed to a 4% annual rate in recent months,
down from the 15% rate of last fall.
Recent declines in wholesale prices of industrial goods should help slow the
pace of consumer price inflation in the near future. The easing of world food
prices will not be felt at the retail level for several months - and then only if
the decline continues. Because stocks of most foodstuffs remain tight, poor harvests
would set off another round of price hikes.
22
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DEVELOPED COUNTRIES: Price Trends
Monthly Percent Change
(three month moving averages, seasonally adjusted)
23
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DEVELOPED COUNTRIES: Composite Price Trends (Excluding the United States)
(three-month moving averages, seasonally adjusted)
3 r A 150
Wage Rates
Stiff increases in wage rates -- the extreme example being the recent 3"[%
hike in the pay of British coal miners - continue in spite of depressed demand
and rising unemployment. These increases are attributable to the militancy of
various labor organizations, demands (or contract provisions) for "catch-up" gains
to match soaring consumer prices, and the weakened resistance of several insecure
governments to inflationary wage settlements. Some observers believe that
reflationary measures will be pushed along before recession takes the starch out
of labor's demands.
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DEVELOPED COUNTRIES: OIL PRICES AND INFLATION
During 1974 the sharp rise in oil costs gave a strong push to inflation in
Japan, West Germany, the United Kingdom, France, and Italy. Since the initial
OPEC price hike in October 1973, wholesale prices in these countries have risen
30% on average and consumer prices nearly 20% -- the sharpest increases in
post-World War II history.
Overall Impact
Higher oil costs directly accounted for one-third of the overall rise in prices
in major foreign economies during the past year or so.* The increase in oil prices
has boosted wholesale prices by an average of 9% and consumer prices by perhaps
half that amount. Japan and Italy have been particularly hard hit because oil meets
three-fourths of their energy requirements. Price levels in the United Kingdom,
West Germany, and France were also boosted substantially, as indicated in the
tabulation.
Percent Increase, December 1974 over
September 1973
Delivered Price
of Crude Oil
Total
Attributable
to Oil Prices
Japan
256
32
11
West Germany
180
16
8
United Kingdom
207
33
7
France
256
30
4
Italy
253
49
12
Most of the oil-induced inflation occurred during the first half of 1974, with
higher oil costs accounting for two-fifths of the rise of wholesale prices in Japan,
nearly one-half in West Germany, and nearly one-fourth in the United Kingdom.
Higher oil costs were also a key factor in Italy's 68% wholesale price inflation
in the first half and France's nearly 50% rate. Because one-half of Canada's oil
consumption is supplied from domestic output under controlled prices, the rise
in Canadian oil prices in the first half was substantially less than in any other
major foreign industrial country -- roughly 100%.
* We have used input-output tables to estimate the impact of rising oil prices on the level of wholesale
prices. We assumed that two-thirds of the October 1973 price hike was passed through by yearend and that
the balance plus three-fourths of the December 1973 price hike was passed through in the first half of 1974.
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The cost of oil remained an important though declining influence on the rate
of inflation in the second half of 1974. In Japan and the United Kingdom, certain
prices affected by higher oil costs jumped after midyear, when price controls were
eased. Japanese utility rates, for example, were raised 70% in July 1974. Oil price
hikes continue to reverberate in the West German, French, and Italian price systems
at a diminishing rate.
Impact on Industries
Industries hardest hit have included chemicals, rubber, electric power, and
textiles. Unit output costs for heavy chemicals in Japan, for instance, have increased
nearly 10% as a direct result of higher oil prices. Transport costs in France, to
cite a second example, have been boosted by 15%-20%. Data for West Germany
indicate that roughly one-third of the rise in machinery prices stemmed directly
from higher energy costs.
Percent Increase in Unit Output Prices Directly Attributable
to Higher Oil Costs Since October 1973
United
Kingdom
Japan
West
Germany
Agriculture, forestry
5.7
3.4
4.9
Raw materials
5.4
8.8
6.1
Refined petroleum
125.1
114.4
71.8
Processed foods
3.6
3.8
4.6
Tobacco
2.7
1.7
1.1
Iron and steel
6.4
5.9
6.5
Nonferrous metals
3.6
6.3
4.2
Fabricated metal products
3.4
4.0
3.5
Chemicals
8.9
10.2
5.1
Rubber
4.0
5.4
3.5
Fibers, yarn, fabrics
3.1
4.9
2.5
Clothing, furs
2.0
3.6
1.6
Leather goods
2.8
3.9
2.7
Wood products
Agricultural and industrial
2.7
5.1
3.6
machinery
2.4
3.4
3.4
Electrical machinery
2.4
3.5
2.8
Transport machinery
3.1
3.2
5.1
Precision instruments
2.0
3.0
2.5
Miscellaneous manufactures
4.3
5.9
2.1
Construction
2.5
4.6
2.4
Utilities
16.6
30.7
6.4
Transport
4.1
7.4
10.6
26
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Indirect Impact
Higher fuel prices have added impetus to wage demands. A prime example
is the case of Japan where perhaps one-fourth of the rise in hourly wage rates
during the past year may be attributed to the added inflation caused by higher
oil costs. To judge by past relationships between price changes and wage increases,
the 1974 wage hikes of 32% would have averaged approximately 25% in the absence
of the oil price rise. Labor productivity also suffered because higher oil costs
reduced final demand and output.
The oil price hikes of October and December 1973, combined with the oil
embargo, also contributed to the unprecedented round of speculative commodity
buying that boosted raw material prices dramatically in the first half of 1974.
In this period, commodity prices jumped an average of 30% even though final
demand had leveled off or declined.
The latest OPEC price hike announced in December will place additional
moderate pressure on prices. If the oil companies are able to fully pass through
the price rise, it will add about 4% to crude oil costs. Our analysis indicates that
the direct impact on wholesale prices in the major countries could be about 0.5%.
Even if oil prices stabilize, inflation will remain a serious problem for the
major industrial countries. Rapidly rising labor costs are a near certainty because
of militant labor demands sparked by the spiraling cost of living.
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Indexing -- the automatic adjustment of wages, loans, and taxes to compensate
for inflation -- is an increasingly popular political response to problems stemming
from spiraling prices. It has proved most valuable in minimizing the redistribution
of income that normally accompanies inflation. While making inflation easier to
live with, indexing can speed up the inflationary process.
Use of Indexing
Index adjustments in wages and pensions usually are triggered only after a
lag and often do not compensate fully for price changes. For financial instruments
such as bonds or savings accounts, both the interest payments and the principal
usually are adjusted retroactively to reflect inflation. Tax rates have been adjusted
in certain countries by linking the value of personal exemptions and/or the
definition of tax brackets to price indexes.
Indexing is not new. For example, it was used as early as 1742 in the
Massachusetts Bay Colony to preserve the real value of government bonds. Most
West European countries began using indexing since the late 1940s. Canada has
recently expanded its program, and Australia and the United Kingdom are moving
to implement or broaden indexing programs. Brazil and Israel now make the most
extensive use of indexing.
Among industrial countries, escalator clauses in wage contracts are the most
widely used form of indexing. In the United States, nearly 4 million workers in
the private sector are covered by wage escalators. In addition, US social security
payments were brought under the system last year. At least some wages or pensions
are indexed in 13 other countries. A number of LDCs - especially Latin American
countries -- have indexed financial instruments with an eye to encourage private
investment.
Proponents of indexing claim that
? adjustment of salaries, pensions, and taxes is socially desirable because
it protects the real incomes of groups with little bargaining power in
the market place or the political arena;
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? adjustment of the value and earning power of financial instruments
promotes economic growth by maintaining incentives to save and invest;
? indexing tends to moderate inflation, since people feel less need to make
extreme financial demands in anticipation of continuing price hikes; and
Social Mortgages/
Wages Security Bonds/Loans Rents Taxes
North America
United States 1917 - present 1974 - present 1742, 1925 .... ....
Canada 1972 - present 1965 - present .... .... 1974 - present
Latin America
Argentina ... .... 1972 - present ....
Brazil 1964 - present .... 1964 - present 1964 1964 - present
Chile 1960-69 1952 - present .... .... ....
Colombia .... .... 1972 - present ....
Uruguay .... .... 1971 - present ....
Western Europe
Belgium 1-948 - present 1955 - present .... .... ....
Denmark 1945 - present 1923 - present .... .... ....
Finland 1945-67 1957 - prescnt 1952-67 1952-67 ....
France 1948-68 1948 - present 1952-58 .... ....
West Gerinany .... .... 1920s
Italy 1945 - present 1950 - present
Netherlands 1965 - present 1956 - present .... .... 1972 - present
Norway 1920 - present 1967 - present .... .... ....
UnitedKingdom 1915-22; 1973-74 .... 1973 - present2 .... ....
Other
Australia 1921-532 ... ....
Iceland 1971 - present 1960 - present 1955 1971 - present
Israel 1949 - present .... 1948 - present 1950 - present ....
China 1949-51 ... 1949-51
New Zealand .... 1974 - present .... .... ....
I. Entries do not necessarily indicate comprehensive indexing in the respective categories. Source: Derived almost entirely from
S.A.B. Page and S. Trotlope, "An International Survey of Indexing and Effects," National Institute Economic Review, November
1974, pp, 46-59, Unclassified.
2. Legislation now pending.
? indexing can contribute to a better allocation of resources - for example,
by maintaining the real return on investment.
? indexing contributes to inflation by raising wage costs and by adding
to aggregate monetary demand,
? weakens public support for anti-inflation policies by taking the sting out
of inflation, and
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? distorts the allocation of resources Unless applied throughout an economy
in a uniform manner -- a difficult task, at best.
Although spreading, indexing remains a minor policy tool in most countries --
mainly because of uncertainties concerning its impact. Many observers are convinced
that wage indexing has intensified inflation, not just made it more tolerable. Finland
banned wage indexing in 1967 after 22 years of experience, Norway is moving
to end the practice, and the Netherlands is reconsidering its program.
Indexing of pensions is strongly supported on the grounds of social equity.
No country that has introduced it seems to have any doubts about the need to
protect citizens with low, fixed incomes.
Indexing of financial instruments has helped to revive confidence among
private investors in at least a few LDCs. Brazil's rapid economic growth over the
past decade is partly the result of indexing measures that stimulated saving and
investment. The same is true of Israel, where capital was fleeing the country prior
to indexing. In Colombia, however, indexing of mortgage obligations has led to
overinvestment in housing, depriving competing sectors of capital.
Indexing of income taxes has been of little benefit to consumers. Except for
Canada, which introduced the measure in late 1974, these adjustments have been
largely offset by increases in indirect taxes to compensate for lost revenues.
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A $65 billion increase in the oil deficit last year led to an estimated $3 1 billion
worsening in the overall trade balance of the OECD countries - from an $10 billion
surplus to a $21 billion deficit. Major shifts in balances in non-oil trade resulted
in an uneven distribution of the payments burden among individual countries.
Twelve Gainers in Non-Oil Trade
Twelve of the OECD countries were able to improve their balances on non-oil
trade, thus mitigating the impact of higher oil prices. West Germany, Japan, and
the United States were most successful. The $37 billion jump in their combined
oil trade deficit was more than offset by a $39 billion improvement in their non-oil
trade. The other nine countries of the 12 gainers together racked up only a
$4 billion improvement in their non-oil balance.
The largest shift in non-oil balances came in trade between the Big Three
and other OECD countries. West Germany, Japan, and the United States together
increased their surplus in intra-OECD trade from $15 billion in 1973 to $28 billion
in 1974, thus accounting for $13 billion of the $33 billion deterioration in the
trade balance of other OECD countries. The Big Three and the other 21 OECD
countries each increased their surpluses with non-oil LDCs by $10 billion and
$6 billion, respectively. Their small surpluses in trade with the Communist area
remained practically unchanged.
The twelve OECD losers in competition for markets saw their non-oil trade
balances worsen by a total of $9 billion, despite an increase in the surplus with
non-OECD countries. Larger deficits in trade with the Big Three were the main
factor in this deterioration. Australia, Canada, Spain, and the United Kingdom
registered the heaviest losses.
Payments Problems of Smaller Countries
Of the smaller OECD countries, Austria, Greece, Iceland, Ireland, Norway,
Portugal, Spain, and Turkey ran larger deficits on non-oil trade than on oil trade.
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OECD Countries: Shift in Trade Balances 1
Billion US $
Combined Trade Balances of the Big Three--West Germany, Japan, and
With Other OECD the United States
Countries
With the World 28 With Non-oil LDC s and
Surplus
Deficit
Communist Count
18
Communist
Countries
With OPEC
Countries
Surplus
Deficit
Combined Trade Balances of Other 21 OECD Countries
With Non-oil LDC s and
Communist Countries
With the With OPEC
Big Three Countries
-12 - < I -11
15
LDCs
Communist
Countries
Negl.
32
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Gaining countries - Improvement in non-oil trade,
Of which:
West Germany - $14.5
Japan - $12.2
United States - $12.0
$43.4 billion
Losing Countries - Deterioration in non-oil trade, $8.7 billion
Of
which:
Australia - $2.4
Canada $1.5
Spain - $1.3
New Zealand - $1.1
Turkey - $0.6
Spain's overall deficit doubled, to $7.1 billion. Despite a continuing large surplus
on services, Madrid was forced to borrow heavily from abroad and .to draw down
its reserves from $7 billion to $6 billion. Greece and Turkey, which incurred trade
deficits last year of $2.6 billion and $1.7 billion, have relatively small reserves
to fall back on. All three countries will find it more difficult to finance large
trade deficits this year because of an expected decline in workers' remittances and
continued softness in the tourist business.
Some of the smaller countries already have moved to curb imports. Australia,
whose trade account deteriorated by roughly $3 billion last year because of large
tariff cuts and poor wool and beef markets, recently imposed controls on imports
of automobile and textile products. Last summer, Denmark sharply hiked taxes
on luxury consumer goods, most of which are imported. Its overall trade deficit
nevertheless rose to $1.5 billion, posing serious financing difficulties.
Trade Balances of OECD Countries)
Total Trade
Non-Oil Trade
Billion US $ f.o.b./f.o.b.
Oil Trade
1973 1974 1973 1974 1973 1974
Countries Recording a Marked Improvement in Non-Oil Balances
West Germany
Exports
67.7
88.6
0.7
1.2
67.0
Imports
51.8
64.8
4.3
11.4
47.5
;balance
15.9
23.8
-3.6
-10.2
19.5
Japan
Exports
36.1
54.9
Negl.
0.1
36.1
Imports
32.6
53.6
5.5
20.0
27.1
Balance
3.5
1.3
-5.5
-19.9
9.0
33
87.4
53.4
34.0
54.8
33.6
21.2
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Trade Balances of OECD Countries)
(Continued)
Billion US $ f.o.b./f.o.b.
Total Trade
Oil Trade
Non-Oil Trade
United States
Exports
71.3
98.5
0.5
0.8
70.8
97.7
Imports
69.5
101.0
7.6
24.2
61.9
76.8
Balance
1.8
-2.5
-7.1
-23.4
8.9
20.9
Countries Recording Some Improvement in Non-Oil Balances
Austria
Exports
5.2
7.0
Negl.
Negl.
5.2
7.0
Imports
6.8
8.7
0.3
0.8
6.5
7.9
Balance
-1.6
-1.7
-0.3
-0.8
-1.3
-0.9
Denmark
Exports
6.1
7.9
0.1
0.3
6.0
7.6
Imports
7.2
9.4
0.7
1.7
6.5
7.7
Balance
-1.1
-1.5
-0.6
-1.4
-0.5
-0.1
Finland
Exports
3.8
5.7
Negl.
Negl.
3.8
5.7
Imports
4.0
6.7
0.4
1.3
3.6
5.4
Balance
-0.2
-1.0
-0.4
-1.3
0.2
0..3
France
Exports
36.7
46.6
0.6
1.2
36.1
45.4
Imports
35.3
50.0
2.9
10.2
32.4
39.8
Balance
1.4
-3.4
-2.3
9.0
3.7
5.6
Greece
Exports
1.2
1.7
Neg1.
0.1
1.2
1.6
Imports
3.6
4.3
0.3
0.8
3.3
3.5
Balance
-2.4
-2.6
-0.3
-0.7
-2.1
-1.9
Italy
Exports
22.2
30.1
1.3
2.2
20.9
27.9
Imports
24.8
37.8
2.7
9.4
22.1
28.4
Balance
-2.6
-7.7
-1.4
-7.2
-1.2
-0.5
Netherlands
Exports
20.4
28.3
2.1
3.7
18.3
24.6
Imports
19.1
27.0
2.8
5.4
16.3
21.6
Balance
1.3
1.3
-0.7
-1.7
2.0
3.0
Sweden
Exports
12.1
15.8
0.1
0.1
12.0
15.7
Imports
9.7
14.4
1.0
2.6
8.8
11.8
Balance
2.3
1.4
-0.9
-2.5
3.2
3.9
Switzerland
Exports
9.4
11.9
Negl.
Negl.
9.4
11#
Imports
11.2
1:3.9
0.8
1.3
10.4
12.6
Balance
-1.8
-2.1
-0.8
-1.3
-1.0
-0.8
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 Approved For Release 2001/08/25 : CIA-RDP80MO1389R000400060001-8
Trade Balances of OECD Countries)
(Continued)
Billion US $ f.o.b./f.o.b.
Total Trade Oil Trade
Non-Oil Trade
1973 1974 1973
1974
1973
1974
Countries Recording a Deterioration in Non-Oil Balances
Australia
Exports
10.0
11.0
0.1
0.2
9.9
10.8
Imports
7.2
11.1
0.3
0.9
6.9
10.2
Balance
2.8
-0.1
-0.2
-0.7
3.0
0.6
Belgium/Luxembourg
Exports
22.3
27.1
0.6
0.6
21.7
26.5
Imports
21.9
28.3
1.3
2.5
20.6
25.8
Balance
0.3
-1.2
-0.7
-1.9
1.1
0.7
Canada
Exports
25.5
33.1
1.8
4.1
23.7
29.0
Imports
23.4
32.1
1.1
3.0
22.3
29.1
Balance
2.1
1.0
0.7
1.1
1.4
-0.1
Iceland
Exports
0.3
0.3
Negl.
Negl.
0.3
0.3
Imports
0.3
0.4
Negl.
Negl.
0.3
0.4
Balance
Negl.
-0.1
Negl.
Negl.
0
-0.1
Ireland
Exports
2.0
2.4
Negl.
Negl.
2.0
2.4
Imports
2.5
3.3
0.1
0.4
2.4
2.9
Balance
-0.5
-0.9
-0.1
-0.4
-0.4
-0.5
New Zealand
Exports
2.7
2.5
Negl.
Negl.
2.7
2.5
Imports
2.2
3.3
0.2
0.4
2.0
2.9
Balance
0.5
-0.8
-0.2
-0.4
0.7
-0.4
Norway
Exports
4.7
6.4
0.1
0.2
4.6
6.2
Imports
5.8
8.0
0.4
0.5
5.4
7.5
Balance
-1.1
-1.6
-0.3
-0.3
-0.8
-1.3
Portugal
Exports
1.8
2.0
Negl.
Negl.
1.8
2.0
Imports
2.7
3.5
0.1
0.5
2.6
3.0
Balance
-0.9
-1.5
-0.1
-0.5
-0.8
-1.0
Spain
Exports
5.1
7.2
Negl.
0.1
5.1
7.1
Imports
8.6
14.3
1.0
3.4
7.7
10.9
Balance
-3.5
-7.1
-1.0
-3.3
-2.5
-3.8
Turkey
Exports
1.3
1.5
Negl.
Negl.
1.3
1.5
Imports
1.9
3.2
0.2
0.7
1.7
2.5
Balance
-0.6
-1.7
-0.2
-0.7
-0.4
-1.0
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 Approved For Release 2001/08/25 : CIA-RDP80M01389R000400060001-8
Trade Balances of OECD Countries]
(Continued)
Billion US $ f.o.b./f.o.b.
Total Trade
Oil Trade
Non-Oil Trade
1973
1974
1973
1974
1973
1974
United Kingdom
Exports
28.0
35.7
0.8
1.7
27.2
34.0
Imports
33.8
48.0
3.0
9.9
30.8
38.1
Balance
-5.8
-12.3
-2.2
-8.2
-3.6
-4.1
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 Approved For Release 2001/08/25 : CIA-RDP80M01389R000400060001-8
DEVELOPED COUNTRIES: TRADE IMPACT OF OIL PRICE RISE*
Because of the enormous rise in oil import costs, the six major foreign
developed countries last year saw their combined trade surplus drop from $14.5
billion to $2.7 billion. Their current account deficit jumped from $1.6 billion to
a massive $19.9 billion.
We estimate that these countries suffered a net rise in their oil bill of $39.1
billion in 1974. At the same time, their exports to OPEC increased by $6.1 billion,
only half of which is attributable to the surge in oil earnings. A sharp rise in
their trade surplus with non-OPEC countries was also an important offset to their
staggering oil bill.
West Germany -- unique among oil importers - actually managed to boost
its surpluses on trade and current account by an estimated $7.9 billion and $5.0
billion, respectively. Japan also did well in offsetting the huge jump in its oil bill,
ending the year with a small trade surplus and a current account deficit of $5.1
billion. The United Kingdom, Italy, and France proved least capable of coping
with the sudden shift in terms of trade; their combined trade deficit increased
from $7.0 billion in 1973 to $23.4 billion last year. Canada, itself a major oil
producer, gained $1 billion less from an improvement in its oil balance than it
lost on net non-oil transactions.
The rise in oil bills reflects an average price increase, c.i.f., of 200% per barrel
of crude. The volume of crude oil imports of the six major foreign developed
countries fell by 3.3%. The rise in the oil deficit was solely due to dependence
on crude oil imports; the balance of trade in petroleum products improved.
The non-oil trade surplus of the six major foreign developed countries rose
from $28.8 billion to $56.1 billion, mostly because of the striking improvement
in the West German and Japanese balances. Sluggish domestic demand in both
countries contributed to a rapid expansion of exports, while holding down the
rise in imports. France's surplus in non-oil trade grew moderately; Italy and Britain
* This article does not attempt to measure the indirect impact of high oil prices, for example, the effect
on the GNP of oil consuming countries, and hence on net demand for foreign goods, or the effect on the
prices of other major internationally traded products. Estimates for 1974 are based on data covering from
9 to 12 months.
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 Approved For Release 2001/08/25 : CIA-RDP80MO1389R000400060001-8
DEVELOPED COUNTRIES: Oil and Non-Oil Trade Balance
Canada
2.1
Developed Countries
Non-Oil Trade
28.8
0.7 1.4 1.0 1.1
Italy
1973
-143
Oil Trade
38
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 Approved For Release 2001/08/25 : CIA-RDP80MO1389R000400060001-8
Developed Countries: Changes in Current Accounts
Change in 1974
over 1973
Current Account
Balances
Oil Trade
Balance
Exports to
OPEC States
Other
Trade
Net Services
and Transfers
1973
1974
Total
-39.1
6.1
21.1
-5.9
-2.1
-19.9
Canada
0.4
0.2
-1.7
-0.2
-0.5
-1.8
France
-6.7
0.8
1.0
-0.2
-0.7
-5.8
Italy
-5.8
1.0
-0.3
-0.5
-2.4
-8.0
Japan
-14.4
2.4
9.8
-2.6
-0.3
-5.1
United Kingdom
-6.0
0.4
-0.9
0.5
-2.9
-8.9
West Germany
-6.6
1.3
13.2
-2.9
4.7
9.7
saw a worsening in their deficits. Canada's non-oil trade slipped from a $1.4 billion
surplus in 1973 to a small deficit, mainly because of weakened US demand.
The increase in sales to OPEC markets, which rose about twice as fast as
overall exports, accounted for less than 10% of the $68 billion rise in non-oil
exports of the six countries in 1974. By contrast, rising exports to non-oil LDCs
contributed 20%-25% of the gain in sales.
Oil consumption in the major foreign developed countries probably will decline
moderately in 1975 because of the economic slump, consumer resistance to high
prices, and conservation efforts. The expected decline in import volume probably
will be more than offset by a rise in average oil prices, from about $11.00 per
barrel to $11.50 per barrel, c.i.f. As a result, the oil trade deficit of the six countries
will rise by an estimated $4.9 billion, largely offsetting an expected one-third
increase in the value of exports to OPEC countries. Non-oil LDCs will provide a
far less lucrative market for sales than last year because their payments problems
are catching up with them. Furthermore, the developed countries, in contrast to
1974, will find that interest payments on loans to pay oil bills will add substantially
to their current account deficits.
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