ANNEX TO ECONOMIC INTELLIGENCE WEEKLY DEVELOPED COUNTRIES: SHORT-TERM ECONOMIC PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500150041-1
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: September 29, 2009
• Sequence Number: 41
• Publication Date: September 25, 1974
• Content Type: REPORT

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STAT
Annex to
Economic Intelligence Weekly
Developed Countries: Short-Term
Economic Pro pear
STAT
CIA No. 8221[74/A
25 September 1974
co" N2 400
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STAT
1. The world's major developed countriesl have just gone through one of
the sharpest upswings and subsequent decelerations in growth ever experienced.
The boom, which began at the end of 1971 as policies generally became more
expansionary, was unprecedented in strength and in temporal coincidence cf
upturns in the various countries. In 1972 the six major foreign economies grew
at a real annual rate of almost 6%. In the first half of 1973, the rate accelerated
to 9%. Each country except Italy achieved a rate of 8% or more in the first half
of 1973.
2. The intensity and synchronization of the upswings resulted in commodity
shortages and strained capacity in basic industries. In the first half of 1973, prices
(measured by the GNP deflator) increased in the six foreign economies at an average
annual rate of 9.1%. In response, most of the governments shifted to more restrictive
policies by mid-1973 - considerably sooner than in earlier cycles. The main burden
fell on monetary policy. In general, the rate of economic expansion - and, to
a lesser extent, the rate of inflation - decelerated in the third quarter of 1973
to what observers hoped would be a "soft landing" near the long-term growth
rate.
3. Growth decelerated much more sharply than expected. Real output of
the major foreign economies grew at an annual rate of only 3.4% in the second
half of 1973 and fell 0.9% in the first half of 1974. Growth of output slowed
considerably in the second half of 1973 in all the countries except Italy. The
small decline in aggregate output in the first half of 1974 resulted mainly from
drops in Japanese and British GNP and a sharp decline in the Italian growth rate.
Rather than a "soft landing," the major industrial countries slipped into the most
widespread recession since World War II. Meanwhile, inflation accelerated to an
annual rate of 15.3% in the first half of 1974.
4. The sharp deceleration in growth is a consequence of several interrelated
factors. In part, it is a direct result of the shift to more restrictive policies. In
West Germany, in particular, demand-management policies had becom? extremely
1. Defined, for the purposes of this report, as Canada, France, Italy, Japan, the United Kingdom, and West
Germany, together with the United States.
25 September 1974
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tight and a sharp slowdown was anticipated. In most of the economies, housing
investment fell substantially because of high interest rates and scarce mortgage
money. Overall demand in some countries also weakened because downturns abroad
h-irt export volume. A pronounced cyclical downturn probably would have occurred
even if there had been no additional deflationary disturbances.
5. The oil crisis that began in October 1973 reinforced coil tractioilary
pressures. Initially, concern about the adequacy of oil supplies eroded business
confidence and depressed investment. Energy conservation measures had a direct
impact on demand, especially on automobile purchases. These measures also
affected other elements of private consumption in a member of countries, as well
as investment in Japan and elsewhere. Actual supply limitations had a major impact
only in the United Kingdom, where the oil embargo aggravated energy shortages
caused by the coal strike.
6. Sharp increases in oil prices in January added to the problem. By shifting
the terms of trade - the ratio of export to import prices - against consumers
in industrial countries, the price hikes reduced domestic purchasing power in a
manner analogous to an increase in indirect taxes. Domestic purchases of goods
and services other than oil had to be cut. This contractionary impact was not
offset by a shift to more expansionary policies. By stimulating inflationary
expectations, increased oil prices contributed to a further rise in prices of most
other commodities.
7. Governments in the major developed countries generally cannot reconcile
their present growth, price, and balance-of-payments objectives. This was often true
in the past, but the difficulty is particularly acute now. Most governments are
having difficulty achieving any of their major aims in full measure. With few
exceptions, the first-half downturn in output or economic growth was accompanied
by record increases in prices and unprecedented trade and current account deficits.
8. Most of the governments have made the fight against inflation their
number one economic priority, although reducing the payments deficit is still an
important objective of Tokyo, Rome, and London. This is a marked shift in attitude
from the 1960s, when policy focused on rapid growth and full employment. Only
in Canada and France, where inflation is viewed more as an international than
a domestic problem, is rapid growth the primary objective.
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9. Demand-management policies - particularly monetary policy -- con-
sequently have remained generally restrictive despite the first-half slump. Indeed,
rather than compensating for the contractionary impact of the oil price rise, several
countries have tightened policies considerably. Some countries now have the most
restrictive policies in years.
10. Popular pressure for a shift to more expansionary policies is not strong,
so far. The tight against inflation in most countries is generally endorsed by
economic interest groups. Labor's interest in fighting inflation has been stimulated
by the fact that rising prices rather than declining employment have been the major
factor eroding income. Although working hours are down sharply in some industries,
unemployment has grown little despite the output slump. Business tends to blame
rising costs rather than sluggish economic growth for the squeeze on profits.
H. Policies are likely to remain restrictive in most of the countries even
though pressures for relaxation will build. Continuing sluggish growth will increase
unemployment, particularly if wages begin to rise faster than prices, as expected.
The profit squeeze and liquidity problems arising from restrictive monetary policies
will generate business pressures for expansionary policies. We nevertheless believe
that most governments will pursue current policies until inflation decelerates
noticeably. This will probably not occur before the end of 1974. More time will
be needed for the economies to respond to the shifts that eventually will take
place. Thus, for the remainder of this year and the first half of 1975, we think
the effect of policies in most countries will be basically restrictive.
12. The present policy mix differs somewhat among countries. Most are
continuing to pursue a tight monetary policy as the key element in their anti-
inflation program. Since mid-1973 the money supply (broadly defined) in most
of the countries has been growing less rapidly relative to nominal income than
itas historicalliy been the case, and the ratio recently has been declining further
(see Figure 1). The reduction in the ratio is particularly great in Japan, West
Germany, Italy, and the United Kingdom. As a result, credit is tight throughout
the industrial world and interest rates are at record levels.
13. Fiscal policies vary more but have become more restrictive in most
countries. This trend is partly due to fiscal drag. As prices and incomes rise, taxes
have increased more than proportionally because of progressive tax structures. The
government deficit is being reduced substantially in Italy and appreciably in Japan.
In France, the budget has moved from traditional balance into small surplus. Fiscal
policy in the United Kingdom has swung around since the beginning of the year
and is now mildly expansionary. In Canada, budget policy remains moderately
expansionary.
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30 --- Seven Major Countries
01 - L _.._~_.._ I I
1971 72 73 74 75
I I I I I
0 1971 72 73 74 75
40 ---
West Germany
1971 72 73 74 75
Developed Countries:
Growth of Nominal
Output and Money
Suppler,
Quarterly changes fin rational currency,
seasonally adJusted) at unnual
percentage rates
1971 72 73 74 75 1971 72 73 74 75
0
_51 I I I -J
1971 72 73 74 75
50 United Kingdom
1
-30-
1 1-401..L---.11 -U
1971 72 73 74 75 1971 72 73 74 75
Note: 1st and 2d quarters 1974 estimated, 3d and 4th quarters 1974 and 1st and 2d quarters 1975 protected.
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Growth Prospects
14. The major foreign economies will begin to recover in the second half
of 1974, unless policy becomes more contractionary. The recovery probably will
be weak. Real GNP is pro ' jected to increase at an annual rate of only 1.5% in
the second half of 1974 and 3.2% in the first half of 1975 (see Table 1). Growth
is expected to be most rapid in France, Canada, and Japan. If US output expands
Developed Countries: Projected Growth in Real GNP
Percent Change I
Estimated
Projected
First
Haif
1973
Second
Half
1973
First
Half
1974
Second
Half
1974
First
Half
1975
Canada
2
9.1
4.5
4.8
2.2
4.0
Francc
8.1
5.7
5.2
3.3
3.9
Italy
4.2
9.7
1.8
0.4
0.6
Japan
12.8
3.0
-8.1
2.4
3.9
United Kingdom2
8.6
1.1
4.3
2.2
0.6
West Germany
8.3
0.3
1.3
1.0
3.9
Six major foreign economies3
9.1
3.4
-0.9
1.5
3.2
United States
7.3
2.0
-3.2
1.54
3.04
Seven major developed countries3
8.2
2.7
-2.1
1.5
3.1
Other OECD countries
5.1
5.8
2.0
1.4
1.6
All OECD countries3
7.8
3.1
-1.5
1.5
2.9
1. Change from preceding half year, at annual rate. All data are seasonally adjusted.
2. GDP.
3. Weighted by 1972 GNP and exchange rates.
4. OECD projections.
as fast as the OECD estimates - which now seems optimistic - real GNP in
developed countries as a group probably will grow at annual rates of only 1.5%
in the second half of 1974 and 2.9% in the first half of 1975.
15. The projected recovery for the six major foreign countries rests almost
entirely on an anticipated pickup in domestic demand. After declining in the first
half of 1974, domestic demand in major foreign economies will grow at estimated
rates of 1.2% in the current half year and 3.0% in the following half (see Table 2).
The foreign sector, which cushioned the recent downturn, is likely to provide less
net stimulus through mid-1975.
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Six Major Foreign Countries: I Economic Trei:ds
Percent Change2
Estimated
Projected
First
Half
1973
Second
Half
1973
First
Half
1974
Second
Half
1974
First
Half
1975
Private consumption
7.1
2.8
-1.1
2.3
3.1
Government consumption
4.8
5.1
0.6
2.8
3.0
Gross fixed capital formation
and inventory accumulation
Of which:
Housing
12.5
2.0
-9.8
-0.4
0.9
Plant and equipment
10.5
13.1
0.3
2.6
3.4
Total domestic demand
9.5
3.8
-1.4
1.2
3.0
Exports
13.1
9.5
13.5
4.4
5.5
Imports
19.1
11.5
1.8
1.1
4.6
GNP
9.1
3.4
-0.9
1.5
3.2
GNP deflator
9.1
10.4
15.3
12.9
10.6
1. Japan, Canada, France, West Germany, Italy, and United Kingdom.
2. Change from preceding half year, at annual rate. All data are seasonally adjusted. Weighted by 1972 GNP
and exchange rates.
16. Our forecast of only a sluggish recovery in the current half rests in large
part on an expected continuing decline in investment. Record interest rates and
tight credit - accompanied in Japan and France by direct c- ntrols or special taxes
designed to discourage investment - have depressed private outlays everywhere.
Fiscal belt-tightening has slowed the growth of government investment.
17. As expected, housing investment has been hit particularly hard. Housing
starts are down as much as 20%-25% in several countries. An upturn is likely in
most countries by mid-1975, but housing starts probably will remain below the
1973 level except in France.
18. Investment in plant and equipment has also fallen in most countries,
although muc1 less sharply than housing. Machinery purchases are less sensitive
to interest rates. Moreover, high levels of capacity utilization and shortages in some
industries have encouraged firms to expand. At the same time, the economic
slowdown has eroded confidence, causing some companies to stretch out or cancel
investments scheduled during the 1973 boom. The threat of nationalization has
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further inhibited investment in the United Kingdom, material shortages have slowed
outlays in Canada, and government controls have retarded investment in Japan.
19. Private and government consumption probably will expand moderately
rapidly through mid-1975. Private expenditures are projected to increase 2.3% in
the current half - somewhat faster than GNP - and 3.1% in the following half.
Private consumption is likely to grow more rapidly than income in the second
half of 1974 because of a slight shift in income distribution favoring low-income
groups and a small decline in the savings ratio. Government consumption will
expand at estimated rates of 2.8% in the current half and 3.0% in the next half.
20. Catch-up wage increases of more than 20% are now common in most
of the economies. Real wages are increasing at an annual rate averaging about 7%.
The gain in earnings is being tempered, however, by reduced working hours and
growing unemployment. Workers' real earnings nonetheless are projected to rise
nearly 3% in the second half of 1974 and somewhat more than 3% in the first
half of 1975.
21. The ratio of household savings to disposable income is expected to
increase slightly during the first half of next year, following a slight decline in
the current half. For the 12 months ending in June, the ratio should be essentially
unchanged from recent years. The desire to maintain living standards and to buy
now in anticipation of further price rises will tend to depress the ratio in Japan
and West Germany in the current half and in a few countries, particularly the
United Kingdom, throughout the period. On the other hand, the ratio will tend
to be raised by consumers' concern over growing unemployment and shorter
working hours, a desire to maintain real savings, and inclination to put off purchases
of automobiles and homes.
22. The foreign sector had a strong negative impact on OECD growth in
the first half of 1974 due to a sharp deterioration in the terms of trade, which
more than offset a growing OECD surplus in volume terms. The continued favorable
volume trend in the second half of the year will again be more than offset by
price movements as the increased price of oil is fully reflected in trade. The foreign
sector will provide a small net stimulus to growth during the first half of 1975
due to continued favorable volume trends and an expected slight improvement
in the OECD terms of trade, assuming no change in oil prices (see Table 3).
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OECD: Foreign Trade Trends
Estimated
Projected
First
Half
Second
Half
First
Half
Second
Half
First
Half
1973
1973
1974
1974
1975
Exports
Volume
16.0
12.2
10.7
5.2
5.6
Price
29.1
23.8
19.0
10.8
9.6
Value
49.7
38.9
31.7
16.6
15.8
Imports
Volume
15.9
7.0
3.3
3.7
4.0
Price
31.8
33.8
47.0
13.7
8.9
Value
52.7
43.2
51.9
17.9
13.3
OECD Excluding the United States
Exports
Volume
12.4
11.9
9.9
5.0
5.1
Price
32.1
22.9
17.2
12.4
11.2
Value
48.5
37.5
28.8
18.0
16.9
Imports
Volume
16.4
10.6
2.9
3.4
3.7
Price
35.1
34.3
44.0
13.6
9.5
Value
57.3
48.5
48.2
17.5
13.6
1. Change from preceding half year, at annual rate. All data are seasonally adjusted.
Outlook for Trade Balances2
23. Projected increases in the value of exports and imports point to a
$1 billion rise in the developed countries' trade deficit in the current half year,
to $15.6 billion. A drop to about $12 billion is indicated for the first half of
1975.
2. This section, prepared before the OPEC price announcement of 13 September, is based on the assumption
of unchangir.- oil prices during the period under consideration. The OPEC countries have increased prices
by about 5% for the fourth quarter of 1974. Taking time lags into account, this measure will have little
effect on the trade balance projected for OECD countries in the second half. The oil producers are planning
a price indexing arrangement that threatens further increases in the cost of oil, amounting to $1 billion annually
for each 1% rise in price. Even the price hike already announced for the next quarter will largely wipe out
the improvement projected for the developed countries' trade deficit for the first half of 1975.
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24. In the second hall' of 1974, oil will continue to be the most influential
factor in the trade accounts. The developed countries' projected increase of
$1 billion in the trade surplus with the non-OPEC LDCs and the Communist states
is expected to be more than offset by a $2 billion jump in the deficit with OPEC
countries (see Figure 2). Sales to OPEC countries will surge by an estimated
Trade of OECD Countries
with Non-OECD Countries*
Billion US $
Trade Balance
-$14.4
$ 78.2
Exports Imports
Trade Balance
$2.5
$43.6
$41.1
5.4
1st Half
1973
Trade Balance
$3.9
$55.2
2d Half
1973
Trade Balance
-$15.6
1st Half 2d Half
1974 1974
Trade Balance
-$1L9 $92.2
Communist
Countries
OPEC
Countries
L
1st Half
1975
Less
Developed
Countries
(excluding
OPEC)
The data in this chart differ from those in Table 4 because the former (a) are presented
on a customs rather than a balance-of-payments b Isis. (b) have been adjusted,
by rule of thumb, from c. I. f. statistics, to an f. o. b, basis, and (c) reflect differing time lags.
Note: 1st half 1974 estimated, 2d half 1974 and 1st half 1975 projected.
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$3 billion, while oil imports should rise by $5 billion. The oil bill will rise because
of a small increase in volume and higher average prices than in the first half', when
some oil was imported at 1973 prices and so;ne under agreements that yielded
a lower average price than now prevails.
25. The deficit with OPEC countries is projected to drop nearly $3 billion
in the first half of 1975 as a result of a continuing surge in their imports. Under
the stimulus of ambitious development programs in countries such as Iran and
Venezuela, these imports are expected to reach $17 billion, up from $11 billion
a year earlier. About half of the gain in exports to OPEC countries will be offset
by increases in OPEC investment earnings in the developed countries.
26. The developed countries' trade surplus with Communist countries in the
second half of 1974 is forecast at $2.3 billion -- about the same level as in three
preceding halt' years. Rapid growth of exports of manufactured goods to the
Communist states is expected to offset the reduction in Soviet grain purchases
and higher prices paid for Communist oil this year. A further large increase in
developed countries' sales probably will raise the surplus by $1 billion or so in
the first half of 1975.
27. We estimate that the trade surplus with non-OPEC LDCs will hit about
$10 billion in both the current half year and the next one. The surplus was only
halt' that large as recently as the first half of 1973. Growing populations, lagging
agricultural production, and relatively high economic growth rates are sustaining
rapid growth of LDC imports from the developed countries. Meanwhile, demand
for LDC goods is stagnating because of the economic slump in developed countries.
The LDC's present large deficits with developed countries cannot continue very
long without a sharp increase in aid.
28. The distribution of the OECD's overall trade deficit among the individual
countries will probably not improve much through mid-1975. We estimate that
the United States, Japan, and France will increase their exports more rapidly than
the average growth of the developed countric;,' markets. Exports of Italy, Britain,
Germany, Canada, and the smaller OECD countries accordingly will probably
increase less rapidly than average. As a result, the German surplus and the British
deficit will remain about as large as in the first half of 1974. Italy, which is sharply
restricting its economic growth to improve the balance of payments, can be
expected to reduce its trade deficit only moderately.
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29. Viewed in the aggregate, developed countries should not have a problei-n
financing their trade deficit. The surplus revenues of the OPEC countries, estimated
to exceed the developed countries' current account deficit by nearly $30 billion
in the period under consideration, will be reinvested largely in the developed
countries. The problem arises from the fact that some countries' receipts of OPEC
investment funds will diverge considerably from their needs. For the purposes of
this study, we have assumed that individual OECD countries will be able to finance
the deficits which we estimate will result from their, present growth and trade
and exchange policies. The trade balances shown in Table 4 for individual OECD
countries thus are indicative of the estimated magnitude of recycling problems.
Price Trends
30. Inflation remains a
serious problem in all the coun-
tries. Despite the shift to more
restrictive policies, prices rose at
an unprecedented rate in the first
half of 1974. Consumer prices
increased at an 10% rate and
wholesale prices even faster (see
Figure 3). For the year ending in
June, consumer prices are pro-
jected to increase about 15%-still
four times the long-tern) average.
The increase in wholesale prices
probably will drop more dramat-
ically but remain well above the
historical norm. Prices are ex-
pected to rise the most in Italy,
the United Kingdom, and Japan
(see Table 5). West Germany's
inflation almost certainly will be
the most moderate for the year as
a whole.
in Major OECD Countries
35 -
Percent change from preceding
half year, at annual rate: country
change weighted by 1972 GNP.
o LL__L_J_.__.I ._J._Ll I
Note: 1st half 1974 estimated,
2d half 1974 and 1st half 1975 projected.
31. A marked change is developing in the primary causes of inflation. By
and large, recent inflation has resulted mainly from excess demand and soaring
prices for commodities, especially oil. Higher oil costs accounted for more than half
of the inflation in the major developed countries during the first half of 1974; higher
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Estimated
Projected
First
Half
Second
Half
First
Half
Second
Half
First
Half
1973
1973
1974
1974
1975
Canada.
Exports
12.2
13.3
14.6
15.9
18.2
Imports (f.o.b..)
11.0
12.3
13.7
15.1
17.3
Trade balance
1.2
1.0
-0.9
0.8
0.9
France
Exports
16.9
19.7
22.2
24.5
26.9
Imports (f.o.b.)
16.1
19.1
24.0
26.9
29.3
Trade balance
0.8
0.6
-1.8
-2.4
-2.4
Italy
Exports
9.6
12.6
13.6
15.3
16.6
Imports (f.o.b.)
11.2
14.8
17.6
18.3
19.2
Trade balance
-1.7
-2.3
-4.0
-3.0
-2.6
Japan
Exports
16.9
19.2
24.8
28.4
30.7
Imports (f.o.b.)
14.2
18.3
26.4
27.8
29.6
Trade balance
2.7
1.0
-1.6
0.5
1.1
United Kingdom
Exports
13.4
14.6
16.9
18.6
19.8
Imports (f.o.b.)
15.3
18.5
23.2
24.8
25.8
Trade balance
-1.9
-3.9
-6.2
-6.2
-5.9
United States
Exports
31.9
38.4
46.3
48.9
51.5
Imports (f.o.b.)
33.2
36.7
47.9
51.2
54.2
Trade balance
-1.3
1.6
-1.6
-2.3
-2.7
West Germany
Exports
29.8
37.8
42.8
44.9
47.2
Imports (f.o.b.)
23.3
28.3
30.5
32.8
35.0
Trade balai,ce
6.5
9.5
12.3
12.1
12.2
Other OECD
Exports
52.2
59.2
65.8
70.2
75.9
Imports (f.o.b.)
52.1
63.3
7-1.4
84.7
88.5
Trade balance
0.1
-4.1
-11.6
-14.5
-12.6
Total OECD
Exports
182.9
214.7
247.1
266.4
286.5
imports
176.4
211.3
260.7
281.0
297.6
Trade balance
6.6
3.3
-13.6
-14.6
-11.1
Net services
-0.4
-0.5
-1.9
-5.1
-5.7
Current account balance
6.2
2.8
-16.2
-20.9
-18.0
12
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Developed Countries: Price Trends
Percent Change 1
Estimated
Projected
First
Half
Second
Half
First
Half
Second
Half
First
Half
1973
1973
1974
1974
1975
Canada
Consumer prices
7.2
10.0
10.4
9.0
8.1
Wholesale prices
18.7
15.5
23.6
19.9
18.2
GNP deflator
6.9
10.7
9.3
8.8
8.5
France
Consumer prices
6.1
9.9
15.0
15.5
13.0
Wholesale prices
15.5
20.2
48.9
10.0
8.0
GDP deflator
6.2
8.6
13.0
13.5
11.0
Italy
Consumer prices
12.1
11.1
19.9
25.0
19.0
Wholesale prices
14.6
26.6
51.0
25.0
20.0
GNP deflator
11.9
10.3
15.5
21.0
15.0
Japan
Consumer prices
13.0
17.0
32.0
18.0
14.0
Wholesale prices
17.0
24.0
47.0
14.0
11.0
GNP deflator
11.0
19.0
30.0
16.0
12.0
West Germany
Consumer prices
6.6
7.5
7.1
8.5
8.5
Wholesale prices
7.8
7.3
8.2
10.0
8.0
GNP deflator
6.3
6.3
6.0
7.0
8.0
United Kingdom
Consumer prices
9.4
10.0
19.0
16.0
15.0
Wholesale prices
5.2
11.8
28.7
15.0
10.0
GDP deflator
12.6
1.3
12.0
14.0
10.0
United States2
Consumer prices
6.0
9.0
11.0
9.0
8.0
Wholesale prices
17.0
9.0
26.0
N.A.
N.A.
GNP deflator
6.0
8.0
10.0
8.0
6.0
1. Change from preceding half year, at annual rate. AU data are seasonally adjusted.
2. OECD estimates and projections.
prices for other commodities were responsible for most of the remainder. The oil
price rise alone boosted wholesale prices by 10%-15%. Given the exogenous nature
of the rise in commodity prices, governments could do little to prevent accelerated
inflation.
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32. The current pressure on prices stems chiefly from internal factors. Both
business and labor are attempting to restore their real income, part of which has
recently been diverted to the world's raw materials producers. The response from
labor has been substantially increased wage demands. In most countries, wage
settlements recently have been running about 50% above last year's level. With few
exceptions, hourly wage rates are likely to increase at least 20% in the year ending in
June. Since the expected slow growth in output will not permit sizable productivity
gains, unit labor costs will rise dramatically. In Japan, rising unit labor costs are
expected to boost wholesale prices about 10%. A 5%-10% increase is likely in most
West European countries.
33. Given the current momentum of wage increases, restrictive fiscal and
monetary policies will not reduce European and Japanese inflation to acceptable
levels by mid-1975. Over the longer term, curbs on aggregate demand may be helpful
to the extent that they encourage business to resist extreme wage demands and force
it to absorb part of any increase in labor costs. Profit margins in various industries
already have been squeezed by the recent fall-off in demand. Faced with added labor
costs that are difficult to pass on, many firms will be more inclined to reduce output
than prices and profits. Relaxation of government policies would ease cost pressures
in the short term by permitting increased production and productivity. If carried
very far, however, such an easing would soon create production bottlenecks,
especially in basic industry.
Comparison with OECD Forecasts
34. Our growth estimates are substantially more pessimistic than those
presented by the OECD Secretariat in its midyear Economic Outlook.3 The
estimates do agree on the likelihood of a modest recovery in the second half of
1974 and somewhat more rapid growth in the first half of 1975. The OECD expects
the six major foreig.i economies to grow at an annual rate of 3.7% in the current
half and 4.5% in the following half. We are projecting rates of 1.5% and 3.2%
(see Table 6).
35. The differences between the two forecasts are most pronounced for West
Germany and the United Kingdom in the current half year and for Japan throughout
the period. The differences reflect our assessment that Bonn and Tokyo will
continue to pursue restrictir? policies for some months and that British output
fell less in the first half than the OECD estimates.
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Developed Countries: Comparison of CIA and OECD Estimates and Projections
of Real Growth in GNP
Percent Change 1
Estimated
Projected
First
Half
Second
Half
First
Half
Second
Half
First
Half
1973
1973
1974
1974
1975
Canada
9.1
4.5
4.8
6.0
2.2
3.5
4.0
5.2
France2
8.1
5.7
5.2
4.8
3.3
4.5
3.9
4.2
Italy
4.2
9.7
1.8
2.5
0.4
....
0.6
1.5
Japan
12.8
3.0
-8.1
-6.5
2.4
4.5
3.9
7.5
United Kingdom2
8.6
1.1
4.3
-6.0
2.2
4.6
0.6
1.2
West Germany
8.3
0.3
1.3
2.0
-1.0
3.5
3.9
4.2
Six major foreign economics3
9.1
3.4
-0.9
-0.4
1.5
3.7
3.2
4.5
United States4
7.3
2.0
-3.2
-2.8
1.5
1.5
3.0
3.0
Seven major developed countries3
8.2
2.7
-2.1
-1.6
1.5
2.6
3.1
3.7
1. Percent change from previous half year at annual rate. All data are seasonally adjusted.
2. GDP.
3. Weighted by 1972 GNP and exchange rates.
4. OECD projections.
36. We believe that domestic demand in most of the economies will grow
less rapidly in the 12 months than the OECD forecasts. Private investment probably
will decline in the second half rather than recover, as the OECD expects. Our
more pessimistic assessment is based on recent data showing continuing severe
limitations on the growth of the money supply in most of the economics. Since
we do not expect savings ratios to fall as much as the OECD indicates, we are
forecasting less rapid growth of private consumption. The two assessments of the
foreign sector's contribution to growth are similar.
37. Our estimates for the OECD's trade performance over the next year are
slightly more pessimistic than those of the OECD Secretariat. Both estimates
indicate a modest reduction in tl:,; OECD's trade deficit, but we see a smaller
improvement than the OECD and, in f2ct, feel that there is a substantia?. chance
for the anticipated improvement to be eliminated by further oil price increases.
Paradoxically, we are forecasting a betie, volume performance over the next
12 months than the OECD Secretariat anticipates. We feel that the OECD's imports,
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measured in real terms, will grow by only 4% over the period while the OECD
is forecasting a rise of more than 6%. The variance in these estimates stems from
the Secretariat's more optimistic appraisal of the OECD's GNP growth prospects
for the next year. In contrast to the improved real performance, however, we see
a further deterioration in the terms of trade offsetting most of the real
improvement, leaving only a slight reduction in the OECD's trade deficit. The OECD
Secretariat, on the other hand, is forecasting some improvement in the terms of
trade compared with the first half of 1174. The difference arnarently stems from
our assessment that, despite gradual improvement, the terms of trade will remain
worse than they were in the first half when higher oil prices were not fully reflected
in the statistics.
Uncertainties
38. The economic outlook for developed countries is particularly uncertain
at this juncture. They have not suffered such a pervasive sl'imp since the Second
World War and have never before experienced such rapid inflation. No clear
indications of an imminent return to acceptable rates of economic growth and
inflation have yet emerged. In several countries, political weakness adds to the
economic uncertainty. Leadership has changed recently in West Germany and
France and could change soon in Britain. The governments in Italy and Japan
are sufficiently shaky to be cautious in changing policy. Specific estimates for
economic growth, inflation, and the balance of payments in the next 12 months
should be viewed only as expressions of general notions about the likely course
of events.
:~9. Although our growth estimates are considerably lower than OECD's, we
see little chance -- perhaps 25% - that time will show our forecasts to be too
low. We see nothing on the horizon likely to give much impetus to growth. The
Japanese government is principally concerned with inflation and the external
balance; unlike the OECD, we think it unlikely that Tokyo will relax economic
policy appreciably befcre yearend. In West Germany, inflation also is the major
concern, and we judge that policy adjustments will merely offset a decline in
stimulus from the foreign sector.
40. We believe chances are substantially greater that our growth estimates
will err on the high side. While our estimates for the first half of 1974 and our
projections for the current half probably are reasonably accurate, the forecasts
for the next half are less firm. The 3% growth rate predicted for the six major
foreign economies in the first half of 1975 is not a result of any expected external
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stimulus. Rather, it is the result of anticipated marginal improvements in all
components of aggregate demand. Some of these may not be realized, and the
acceleration forecast for the first half of next year, therefore, may simply not
take place.
41. Our doubts do not extend to fears of a real depression. The situation
has substantial elements of stability. Nominal wages will be increasing fairly rapidly,
investment is strong in energy-related industries, and the impact of last winter's
drastic increase in oil prices will diminish with time. More importantly, we believe
that if the economic picture becomes decidedly darker, governments would rapidly
alter priorities from fighting inflation to maintaining employment.
42. While we see little on the horizon that is likely to produce higher growth
rates than we project, events have already occurred that may well result in lower
growth rates than we have forecast for the first half of 1975. In particular, our
assumptions about constant oil prices and US economic growth now seem
optimistic. The recent OPEC decision on prices for the last quarter of 1974 will
raise the cost of oil to OECD countries by $5 billion per year. The oil producers
apparently plan increases of similar size in the following quarters. The OECD
estimates of US growth that we have used in our projections are now viewed as
unrealistically high by most private forecasters.
43. Other contingencies that could further depress growth below our forecast
are:
? A reduction in the share of disposable income spent on consumption.
? Inability of countries to finance their projected deficits.
44. Our estimates are based on the assumption that consumers will try to
maintain living standards in spite of inflation and that there will be a tendency
to buy early to avoid even higher prices later. If consumers become more concerned
about future employment and real incomes, savings could rise and consumption
could become a depressant in economic growth.
45. We have assumed that private financial markets, with some assistance
from the IMF special lending facility and bilateral government loans, will be
sufficient to deal with the recycling problem during the period under consideration.
If this is not the case, countries with extremely large projected deficits, such as
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Italy and the United Kingdom, may be forced to curtail net imports. This could
be done either directly, through changes in trade and exchange rate policies, or
indirectly, through more restrictive demand management policies. Either set of
policy changes would bode ill for growth prospects in developed countries.
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