DEVELOPED COUNTRIES: GROWTH, INFLATION, AND TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000600050010-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 44
• Document Creation Date: December 16, 2016
• Document Release Date: October 18, 2004
• Sequence Number: 10
• Publication Date: October 29, 1975
• Content Type: MFR

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Overview on Recovery
The Big Six developed countries are show.i.ncj signs of
a slow emergence fro,sl the deepest economic slump since
World War :I:i. Japan touched bottom last spring. For France
Italy, West Germany, and Canada, the summer mon Lba proba')ly
marked the low point of the recession; in Britain the sl.iimp
is likely to persist well into 1976. With mosL elements
of demand expected to remain sluggish, recovery is likely
to be painfully slow. In first half 1.976, we expect real
GNP growth in the Big Six to approximate a 3% annual rate,
an anemic performance for the recovery phase of a business
.cycle.
Growth prospects are best in France, Canada and Japan,
where recovery is likely to run at about 4%. Italy and West
Germany will trail with growth rates between one and two
percent. Britain, which has lagged the other developed
countries throughout the current recession, is expected to
slump until. second half 1976.
Investment
The massive swing toward inve.tory liquidation was a
big depressant on economic activity in first half 1975, when
the collective GNP of the six countries fell at an annual
rate of 4%. Now that stock reduction has largely run its
course, the Six can expect to register a one percent race
of increas,~in real GNP during the second half of this year.
Still lacking, however, is any strong impetus to renewed
sustainable growth.
Private investment shows little sign of leading a
vigorous recovery in economic activity. Fixed investment
in plant and equipment fell sharply in first half 1975.
Further cutbacks are slated into 1976 in several countries,
as excess capacity plagues most manufacturing industries.
Only in France, where industrial capacity was shortest
before the recession, is a strong rebound in plant and equip-
ment investment likely. Housing construction will fare
better than manufacturing investment.
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Con ;;lllll ~t:i.Gll
Households continue to save an unusually large fraction
of their dispo:;..lble nco iiu:s, putting a crimp in Consumption
spending. A rei.urn to more Ilorilla]. savings, rates,. which is
not yet in evicdence, would yield a strong boost in demand.
The t:i.lning of thin turnaround is highly uncertain, depending
on consumer percc:ptions of emple'1nr>nt opportunities and other
even more nebulous factors that determine confidence levels.
At present, our best cc;ti.mate is for only a 2.5% annual rate
of grocth in conshmptiion in first- half 1.976. Japan and France
should enjoy the fastest pickup in consumer spending, while
British consumption will be depressed by anti-inflationary
measures.
Government Policy
Government spending has propped up demand in most coun-
tries during the recession. In an effort to spark recovery,
the governments of France, Italy, and, Germany introduced
expansionary programs late last summer. Japan introduced
a series of small. reflationary measures throughout the year,
while Canadian fiscal. policy has maintained, a fairly neutral
tack for most of 1976. London, still grappling with a 25
inflation rate and an enormous budget deficit, sees little
leeway for further stimulus.
The French, German and Italian recovery efforts are
meant to be one-shot affairs that would be phased out next
year as hoped-for revival in the private sector gets under
way. Fears of huge budget deficits and accelerate,.i inflation
inhibit more aggressive efforts. The French and Italian
packages are particularly large and should have a marked
effect on spending early in 1975. The German measures are
more cautious and were designed to do little more than offset
anticipated cutbacks in other sectors of the economy.
Tokyo's recovery efforts have 'been marked throughout by
he-sitation and caution.
Unemployment and Inflation
The slow pace of economic recovery will do little to
relieve the large scale unemployment that now afflicts the
major developed countries. "Except in Japan, the jobless
rate will, rise through yearend. In Britain the unemployment
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l.tt1. f1L; RCs~litL. t.dL i. L \ ., 8 ,
rolls will cc)nt.inu(- to lengthen ii) first half 1.976. In
Germany, Italy, and Canada the unemi~aaynusrll: rat-c is
likely to hold s Lcaicly during the firs L :,i.x months of next
y(-ru-. An ilnprov:i.ny job pi tore should davalnp in Prance,
around the fi.r:,t of the year as that country's recovery gets
under. way. :r.n Japan, slow recovery will tend to increase
average hours worked per week, and the unemployment figures
will change little in first half 1976.
We expect inflation to slow through first half 1976,
though it will remain quite rapid by historic standards.
Wcrst Germany should continue to show the best price perfor-
rnance, with inflatiol. uUnning at a 6% annual rate. French,
Japanese, and Canadian inflation will run about 9 percent,
and Italy should register roughly* a 1411.- annual rate. Britain
is unlikely to push its inflation rate much below 15 co'. during
the first half, though its price performance should improve
slowly.
The Foreign Sector
The strong improvement in the current account balances
of the Big Six in first half 1976 will be reversed during
the second half of this year and first half 1976. A sharp
curtailment of imports -- linked to inventory liquidation --
accounted for the turnaround ..n current account balances
that i-'rance, Italy, and the United Kingdom enjoyed during
the first half of this year. Exports declined less rapidly.
Cutbacks in imports helped Japan sustain the strong improve-
ment in its current account that bo;an in the second half
of 1974. West Germany's huge current account surplus was
reduced somewhat as exports slumped even more than imports.
Canada bucked the trend and slipped deeper into deficit as
exports fell and imports rose.
With the exception of Canada, the current account positions
of all the developed count.riLs are deteriorating sharply in
the current half year. Oil imports have picked up following
a drawdown of stocks; except for Britain, other imports also
are picking up as demand and economic activity begin to
revive. We estimate that the combined current account balance
of the six countries; will go from a tiny $100 million surplus
in first half 1975 to a $4.G billion deficit' in the second half,
then slip even further to a $5.9 billion deficit in first
half 1976.
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Lee i ~.t n R f t.i ~ ~ ~ . ~ k:~ ~?.b o u P_
Major, Developed oi.~r,trier : Current Account ],alancon
By 11aa.f-yeaa:
13i 1.1ion
US $
)?ro1C'ctod
1.97411
19751
1.97511 1
97G:J:
Total
-6.7
.1
-4.6
-5.9
Canada
-1.5
-2.7
-2.1
-2.3
France
-2.8
.1
-.8
-2.1
Ital.y
-2.9
-..2
--.9
-1.2
Japan
.3
.8
-.4
-1.0
United Kingdom
-4.4
-1.3
-2.1
-1.9
Wast Germany
4.6
3.4
2.2
. 2.6
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0111 FI ILE11"1
1)nVl ,o1'Lll GUUN'1'R:I:I :, - INVI?;N'.I.'o1:1:ES IN P1. RS i'l;C:'r':CVE
Inventory-bui].di.nq wn.-. reduced sharply in early 19 1 5
in .four of the major for.t.:i.tln countries, as well ,as in the United
Stages, halting the rapid acCulliulal:ion of surplus sLOcks that
occurred last ycrl.r. * In all. of the court Lri es cxem:i.ncd, except:
the United Kirlcldom, cumulative surplus stocks appear to have
peaked after the turn of the veer.. In Japan, Canada, and the
United State:., they hit record or near-record levels. Moreover ,,
because surplus stocks of this magnitude are unusual at this
stage of the business cycle, we expect stoc;k,buildincf to play
an abnormally weak-and perhaps evc.ii a negative-role in recovery
over the next few quarters.
In early 1975, companies attempted to bring their excess
inventories into line with sagging sales. In three of the ma-ior
developed countries, they reduced st-ickbui].ding substantially,
while in two others they actually cut inventories.
o In Japan, stockbuilding in the first quarter amounted
to only one-fourth of stock additions in fourth
quarter 1974; stocks probably declined in the
second quarf-er.
o In Canada, stocks accumulated in the first quarter
at about one-third the 1974 rate.
o In West Germany, stocks declined slightly in the
first quarter,.as they had in late 1974.
o in the United States, manufacturing and trade
inventories fell in four of the first five months
of 1975, sliding down at a record pace in May;
total stocks, including raw materials, dropped
by $3 billion in the first quarter and $5 billion
in the second.
s In the United Kingdom, stockbuilding continued at
about the same low rate as in fourth quarter. 1974.
? For a definition of surplus dock acn,nulariont as used in this article, sec the methodological note,
which follows the second graphic. France and Italy arc excluded from this analysis because of a lack of
quarterly data.
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'l'hc. clcclinc in ldi nc was, a major, factor in the
f l.l-`ii:~C]l.lil:rl:l:]" c.leI.i .1':LUI"il{ 1.UI'1 i n ):("z al ('CNP (S(:ia`i(.)I'1i11 111 iiCl:~11 i. '.cl~
in the U n.i t. d r~ttli.c.;, the Look dr.~lrac own account:cad for Tlc:
entire :3'? d]. op in GNP. in japan, even though final. demilnd
rose s.l.i.ghLly in the first quarter, G111? fell because of ill--
veritory tadjuutl;lents.
Percent
Chan~;c Attributable To
First Quarter
Change in ?GNP
Inventories
Final Demand
Canada
-1.4
-1.5
0.1
Japan
-0.8
-1.1
0.3
U!litcd Kingdom
0.1
-0.1
0.2
United States.
-3.0
-3.0
West Gennany
-3.1
-0.1
-3.0
Cumulative surplus stocks are the largest in Japan,
having reached about. 10% of GNP in the first cnicirter. Janar,
typically experiences wide swings in stock; dcm.ttnd relationships
be ause of the reluctance of business firms to lay off workers.
In West Germany and Canada, surplus stocks as shares of GNP
are roughly half those in Japan. The United Kingdom is a
special case.. with no surplus stock accumulations at present.
Low rates of stockbuiiding since 1970, a large stock draw
down in early 1974 during the coal miners' strike, and a
surprising firmness in final demand until recently have
moderated accumulations:
implications fug Recovery
In sharp contrast with most earlier pcstrecession
periods, when inventory rebuilding gave a strong boost to
expansion, stock changes are expected to be a neutral force
at best for several months to come. A key factor determining
the role of stocks in upswings is the timing of the inventory
cycle peak in relation to the business cycle. Usually, recovery
begins at a time when inventories already have neared their low.
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On those .1-r11-e occas, %ahcll (.110 :i.nvellL 03.y r,ycl.e pc llc and the
1>L1c:;:L11C5fi cycle. t;I:ol.lcll) llil.vc Uvcrl.ral_>pCfl--n now r;1j:)l'iC lI- i to
the else n the Uni.t:c'Cl StiLc:; and ~I~11)c,11 -:;Lat:l:buia.cl.:i.llcl hrls re -
inai.ned weal: or neg iL.:i.vc: for the f:ir:- L f ete c4uar::c:r::i of the
recovery pcricd. In Gonnnny and Ccmadla, the I.11'/oil t-Or\r
ove1:hancl nlay clct:ua ;_ l.~l delay the onset of rccove.i:y until. 7 cite
in Lhe year.
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[3 f;VP.1(I .i (I ('lOtlntriGS:
Trends in Stoc?buiiding
United Kingdom
West Germany
I?~
II
1973 1974 1975 1973 , 1974 1975
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I ovolnped Countrics: I.)cvi"ltiiln of !nugatory
/lrcuinniatiuns irutn t.orti)=6 cart Trend
(its a pninlill (if 11,10) rl
CAN AD
`~~ I I I f' I ~~ I
M511 w
b5 , 10 !51
JAPAN
I I I
I I ~ I
-to
1YSS a 00
I V I VLl I
I I I
t. . 1 .I .
es
I I I I 1 1
10
1a1 n 00 - es 10 151
Dashed verticollines denote bus/nm cycle lrouglu.
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ILLEGIB
Dashed v ical knrss dwxn' t bus news cyce troughs.
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~~1111 i~ l;:l'~ ~ UAIw
D1;VELOI.'I;l) C:OUIT1.TTE"I; : 1 I4'1'T;121)1:;1'];N!)l:;i~CE AND ]?,CONOi'1]:C G11OW'.I11
If frt:r; of ]:eno Jed .1.nflaL:ioil or haymr..nl:s prol)l.em,
ci:wse the IncdU:.;tria.l nations to rely o:n'the United States or
any other s:i i;cla..c country for exnc?rL-l.r_d c]r.oLw~th, recovery w.i.ll
be long anca slow. l xcept ill l:l;e cane of Ca:-r.'la, the exhorts
of the Big Seven are Loo dispersed and their sh?".rc in final.
demand too small for economic L)rosnerity to hinge on refla-
tion by one trading partner.
Induced Growth*
..Despite strong linkages among many OECD economies, only
Canada among the Big Seven is strongly affected by economic
growth in a single trading partner. Its exports account for
20% of GNP, with 65% of foreign sales going to the United
States. We calculate that Canadian'GNP rises by about one-
third of a percent for every 1% increase in US GNP. This
estimate takes into account the direct and indirect effects
of US growth through enhanced demand for Canadian products
in the United States and in third countries.
The induced impact of growth in any other major country
is' at most one-fifth, of the initial rise in GNP in the "lead"
country.
o France: West Germany, the United States, and the
United Kingdom induce the most growth, in all
cases less than 0.2% for each 1% increase in
their own GNP.
o West Germany: France, the United States, and
the United Kindgom each induce about 0.17% in
GNP growth.
o Italy: A 1% rise in West German output adds:
a fifth of a percent to GNP growth.
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Unites] ],,.i ngelom: Uni.tcfi St:ni:e:, inducer;
the gr.e~n(:w L i.ncrc 7.2
554.1
53.0
Switzerland
-2030.9
-35?1.3
356.3
4.2
057.6
272
1
Turkey
---182'4.0
-1063.9
-223.0
-501.1
141.0
.
-75.7
United Kingdom
10 27.7
-5034.1
-1472.2
-5171.0
381.6
-391.3
United States
-2466.0
-4220.4
6589.4
-1577.6
2410.9
1233.E
* Totals may not balance due to time lags in the recording
of transactions and to statistical factors.
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OECD Countries: First Half 1975
Trade Balances, Annu
alized
Million US $
Sma ;.er
Big OECD
World Seven Members
OPEC
Non-Oil
LDC
Communist
Countries
Total
13473.2 -20003.7 - 21945.7
-35764.1
31577.6
12726.3
Australia
2220.1 -317.5 166.7
-46.9
1723.8
775.1
Austria
-1779.8. -2556.4 174.4
-65.1
243.9
418.rx
Belg/Lux
735.4 -1709.3 2236.3
-502.4
662.3
342.1
Canada
'-2560.8 -1115.0 252.0
-2969.2
622.9
544.3
Denmark
-444.0 -39.0 -178.6
-340.3
145.3
-31.3
Finland
-1904.2 -1042.9 -517.F,
-87.7
-15 3. 7
-9A.7
France
2459.5 -1406.3 2771.1-
-4171.5
4206.4
1055.3
West Germany
21358.6 2754.5 12057.3
-1240.1
3770.5
4015.0
Greece
-2524.5 -1484.-) -529.5
-353.6
-283.0
125.5
Iceland
-119.8 -21.7 -27.7
2.L
-3.1
-5.1
-Ireland
-761.0 -440.8 -57.
-139.3
-115.0
-10.5
Italy
-11.0 -1059.1 1710.9
-2943.9
1570.1
710.6
Japan
4122.9 498.4 934.6
-6245.1
(8312.1
2624.9
Netherlands
147:3.2 1956.4 1129.3
-3078.0
1130.4
273.2
Norway
-320?.2 -1710.9 -1300.2
-361.7.
48.'4
132.3
Portugal
-1593.6 -980.- -283.0
-202.5
-202.5
-94.1
Spain
-7709.2 -35.1) -4193.3
-2602 55
- 20.9
-'11i.
Sweden
549.7 -1472.5 1293.5
-154.6
607.0
207.x'
Switzerland
-746.0 -3270.5 794.1
363.'6
920.3
44
Turkey
-3013.0 -1921. 3 -512.3
-525.5
-4
-79.7
United Kingdom
-5419.0 -5055.0 342.7
-2115.1
139. .
1
United States
12532.9 31?..0 2096.4
-5533.?
7672.0
5
* Totals may not balance due to time lags in the recording
of transactions and to statistical factors.
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