CURRENT ECONOMIC TRENDS IN WESTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050008-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 8
• Publication Date: January 1, 1973
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Confidential
Intelligence Memorandum
Current Economic Trends in Western Europe
CIA
ER IM 73-10
January 1973
D
Copy No.
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ail
Confidential
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1973
1. Business is picking up in Western Europe. The cyclical slowdown,
aggravated by the 1971 international monetary crisis, had generally
bottomed out by mid-1972. Although the strength of recovery varies,
virtually all countries report improvement ir, their economic performance.
The real growth of gross national product (GNP) averaged about 4% in
1972, up from 3% in 1971. With most systems "go," government, business,
and labor leaders expect a further upsurge in economic activity this year.
Expected real growth rates range from 4% in Italy to 6% in France and
West Germany (see the table). The average for Western Europe should easily
top 5%, compared with 6-1/2% in the United States and 10% in Japan.
2. A high level of consumer buying and rising government spending
last year, especially in the United Kingdom and West Germany, cushioned
the slowdown precipitated by flagging investment demand that reflected
businessmen's worries about shrinking profit margins and declining export
growth. Widespread fears of an impending recession thus proved groundless.
Also, the return to fixed exchange rates, following the December 1971
Smithsonian agreement, provided a further boost to business confidence.
Export demand, generally sluggish during the first half of 1972, revived
strongly in the latter part of the year, led by sharply rising orders for
consumer goods and industrial raw materials. Last year the gradual rise in
industrial output reflected primarily a fuller utilization of productive
capacity. Increasing profit marins and the generally improved business
outlook are now generating a new spurt in investment that will accelerate
in the course of the year.
3. Inflation is a serious problem throughout Western Europe, and
unemployment is unacceptably high in a number of countries. including
France, Italy, and the United Kingdom. The economic slowdown generally
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Gross National Product in Selected
West European Countries
a. Unless otherwise indicated, converted to oars at Smithsonian exchange
rates.
b. Forecast.
c. Converted at the rate of $2.50 to the pound.
GNP in 1972
(Billion
Real Growth over
Preceding Year
(Percent)
Country
Current US $)a
1972
1973b
Austria
20.1
5.5
5'h
Belgium
34.6
4.0
4'h-5
Denmark
20.7
4.5
5~6
Finland
12.9
4.5
6
France
198.0
5.5
6
Ireland
5.2e
3.0
4
Italy
118.0
3.0
4
Netherlands
45.1
3.5
4'h
Norway
16.5
4.2
4-5
Sweden
41.4
2.0
4
Switzerland
29.3
4.5
4-4%
United Kingdom
133.0c
3.5
5
West Germany
257.0
3.3
6
was too short and too mild to check inflationary tendencies, and the
renewed upswing is too recent to have generated a substantial rise in
employment. Despite government efforts to control inflation, living cost
increases have accelerated in virtually all countries. Led by sharply rising
prices for foodstuffs and services, especially rents, the increase in consumer
prices reached an annual rate of about 7% by the end of 1972. The
seriousness of the problem is underscored by the fact that many West
European countries, most importantly West Germany, are entering the
expansionary phase of their business cycle with rates of inflation exceeding
those prevailing during the preceding peak. Moreover, in those countries
also plagued by large-scale unemployment, the high rate of inflation inhibits
government efforts to create more jobs.
4. Governments throughout Western Europe recognize that fighting
inflation requires careful management of aggregate demand, including a curb
on public expenditures, a slowdown in the growth of the money supply,
and tighter credit policies. In addition, it requires extensive
labor-management cooperation to hold down excessive wage and price
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increases. Central government budgets for 1973 - other than in Italy and
the United Kingdom - generally project expenditure increases roughly in
line with, or less than, the expected growth of money GNP. But with much
of the recent increase in public spending coming from state and local bodies
beyond the immediate control of the central authorities, the overall impact
of government spending remains uncertain. With the exception of the United
Kingdom, currently introducing Phase II of its stabilization program, and,
on a more limited scale, Ireland, none of the West European countries has
adopted systematic wage-price guidelines, much less a formal incomes policy
comprehensively defining permissible wage and price increases. A number
of countries, however, including France, the Netherlands, and Norway,
maintain limited controls over prices.
5. With economic expansion accelerating, price pressures are not
likely to ease significantly in the absence of more stringent controls (see
the chart). Labor probably will intensify its wage demands as living costs
continue to rise and jobs become more plentiful. There are already signs
of increasing union militancy in some of the West European countries -
France, the United Kingdom, and West Germany - that could precipitate
disruptive strikes if wage demands are not met.
6. The broadly based 1973 economic upsurge in Western Europe
should sharply boost US exports and improve the global US trade balance.
Last year the traditionally large US trade surplus with Western Europe
turned into a sizable deficit. For cyclical reasons, the United States
purchased more goods from Western Europe than it was able to sell there.
The Smithsonian currency realignment, moreover, raised the dollar costs
of US imports without immediately affecting the volume of trade in either
direction. US economic growth in 1973 is expected again to exceed that
of Western Europe, but the growth differential is narrowing. Moreover, v,ith
capacity utilization already relatively high, the West European countries
increasingly will have to expand their productive plant to raise output.
Rapidly rising wages in all of the countries and labor shortages in some
will also stimulate heavier investment in labor-saving machinery. Both factors
promise a broadening market for high-technology US machinery and
equipment. At the same time, inflationary pressures in Western Europe will
remain stronger than in the United States, increasing the competitive edge
gained by US manufacturers from the Smithsonian currency realignment.
7. Austria's longest and strongest postwar economic boom shows no
signs of weakening. Strong consumer spending generated by virtually full
employment and rapidly rising wages, buoyant investment in machinery and
equipment, flourishing exports, and thriving tourist business all combined
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Consumer Price Increases in Selected
Industrialized Countries, 1972 and 1973
AUSTRIA
BELGIUM
DENMARK
FINLAND
FRANCE
IRELAND
ITALY
NETHERLANDS
NORWAY
SWEDEN
SWITZERLAND
UNITED
KINGDOM
WEST
GERMANY
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MUM
61
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1972
1973
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to generate a 5-1/2% growth in real GNP. Inflation is the only major problem
casting a shadow on this otherwise rosy picture. The rise in living costs
accelerated, with the consumer price index up nearly 7% for the year.
8. Growth is expected to continue unabated in 1973, with real GNP
rising another 5-1/2%. The recent reciprocal 30% reduction in tariffs on
industrial trade between Austria and the European Community (EC)
countries and the cyclical upswing in West Germany, Austria's principal
trading partner, should give a further boost to export trade, stimulate
continued rapid growth of investment, and guarantee full employment.
Inflation will remain the major issue. The high level of capacity utilization
in industry, the tight labor market, and the recent introduction of a
value-added tax could accelerate cost of living increases to as much as 10%.
To head off excessive price increases the government and the National Bank
instituted a six-months' "cooling off" period, and labor and management
agreed on a "stabilization pact." The effectiveness of these measures remains
to be seen.
Belgium
9. The Belgian economy last year staged a mild comeback from its
short-lived 1971 slowdown. Real economic growth exceeded 4%. Private
consumption and government spending were the main expansionary force
throughout the year. Investment rose only marginally, reflecting in part
more cautious foreign investment in Belgian construction and manufacturing
industries. Industrial production, stagnant during most of 1971, picked up
rapidly in 1972, paced by the output of consumer goods and export-oriented
industries. Despite the overall improvement in industrial activity,
unemployment continued to rise through most of 1972, averaging about
2% of the labor force for the year. Nevertheless, wages and salaries have
continued to rise sharply, contributing to rising inflationary pressures. The
cost of living in 1972 rose about 5%, high by past Belgian standards but
somewhat below the West European average.
10. Economic expansion is expected to accelerate in 1973, with real
growth reaching 4-1/2% to 5%. In the face of favorable world trade and
domestic sales prospects, manufacturing industries are planning a significant
rise in investment. Housing starts also are expected to be up substantially.
Private consumption and government spending should grow at
approximately last year's rate. Export de nand will remain strong, but the
trade surplus will decline as faster domestic growth generates a more rapid
rise in imports. Unemployment is not likely to decline significantly during
the year, because employers tend to increase working hours as the expansion
gathers momentum rather than hire additional workers. Continuing slack
in the labor market combined with increases in labor productivity should
moderate inflationary pressures.
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11. Recovering from a slump, the Danish economy registered real
growth of 4.5% in 1972, up from 3.6% in 1971. The removal of the EC's
import duties on cattle and large sales of butter to the United Kingdom,
which helped raise Danish exports 20% over 1971, were a major factor
aiding the recovery. Consumer demand, lethargic in 1971, grew 3.5% during
the year. Adversely affected by uncertainty concerning the ratification of
EC membership, industrial investment lagged, posting a gain of less than
3%0 over 1971. Reacting to increased export demand, industrial production
grew about 5% in 1972, reducing unemployment to only 1% by the end
of the year. Inflationary wage increases, brought on by the high level of
employment, contributed to a 7% rise in consumer prices in 1972.
12. Prospects for 1973 are for real growth in GNP of about 5-1/2%.
Denmark's entry into the EC is expected to produce a major increase in
investment expenditures. Continuing recovery of consumer demand should
also help fuel the expansion. Industrial production is expected to increase
by nearly 6% as export demand remains high and inventories are built up.
The principal problem area is inflation, which is expected to continue at
about the same rate as in 1972.
13. The Finnish economy in 1972 pulled out of an 18-month
recession. The GNP posted a real gain of 4.5% over 1971. Stimulated by
a 25% increase in demand for exports - mainly paper, lumber, and metals -
industrial production for the first eight months of 1972 was 9% higher
than the corresponding period a year earlier. This figure overstates the
recovery, however, as strikes had cut heavily into 1971 production.
Consumption showed a modest increase in 1972. Despite a gradual easing
of the money markets caused mainly by government policy actions,
businessmen were reluctant to invest because of the uncertainties
surrounding the signing of an industrial free trade agreement with the EC.
Inflation remained a major problem in 1972, as consumer prices rose nearly
7% compared with 6% a year earlier. Despite the pick-up in the economy,
unemployment rose to 2.7% of the labor force, up from 2.2% in 1971.
14. The economic revival is expected to gather steam in 1973 as the
signing of an EC agreement stimulates industrial investment and exports.
Real GNP may rise by as much as 6%. This expansion should reduce the
unemployment rate to the 1971 level. But inflationary pressures probably
will c,,),ntinue virtually unabated, causing another 7% rise in the cost of
livins.
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15. The French economy was strong throughout 1972, with real GNP
growing by 5.5%. Consumer demand and private investment were buoyant,
and governmental policy shifted from being moderately expansionary to
a more neutral stance. Businessmen became increasingly optimistic after the
first quarter as orders steadily mounted and inventories declined. The
balance of payments, as well as the trade balance, remained in surplus,
as French exporters continued to exploit the price advantage obtained from
the currency realignments of recent years. The main problem is inflation.
Prices, up 6% for the year, have been rising at a 9% annual rate in recent
months. Unemployment leveled off by September but remains high by
French standards at about 2.5%.
16. The outlook is basically for more of the same in 1973. Investment
should rise by nearly 7.5%, leading to growth of close to 6% in real GNP.
Some improvement may occur with respect to unemployment and the
balance of payments. But inflation, fueled by 11% wage increases, is likely
to worsen unless the growing public discontent forces the government to
take stronger action. The big question mark is the March legislative election.
Recent polls suggest the likelihood of large gains for the leftist coalition.
Although a leftist victory appears unlikely, the prospect of a significant
loss of power by the Gaullists could disrupt investment plans and lead to
increased hoarding and a considerable flight of capital.
17. With its real GNP growing at about 3% a year, Ireland in 1972
continued to recover slowly from the 1969-70 economic slump. Growth
was led by expanding exports and consumer spending, and investment
showed some improvement. With imports sluggish - reflecting the
economy's slow pace - and exports rising rapidly, the trade balance
improved in 1972. Unemployment, ranging from 7% to 8%, and inflation,
fed by rapidly rising wages, remain major problems. In 1972, consumer
prices probably went up about 9%, the sharpest rise in Western Europe.
Official efforts to slow inflation were restrained by fear of aggravating
unemployment.
18. In prospect for 1973 are a gradual pick-up in growth (possibly
to 4% or so), continued rapid inflation, and continued high unemployment.
The widened duty-free market resulting from Ireland's entry into the EC
and the lagged effects of floating the Irish pound should stimulate export
industry and enhance Ireland's attractiveness for foreign investment. The
favorable impact on employment, however, is not likely to be strong in
the short run. With unemployment remaining high, the government will
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hesitate to curtail the growth of the money supply. With the labor unions
militantly opposed to controls, wages will continue to rise. Led by soaring
food prices, inflation is likely to continue at about 9%.
Italy
19. In 1972 - and extending into 1973 - political and economic
uncertainties in Italy have loomed large in slowing economic recovery. The
growth of real GNP in 1972 was 3%, disappointing but still an improvement
over the 1.4% posted in 1971. Although total governmental spending was
up, public investment fell considerably short of the mark, partly because
of the usual bureaucratic red tape. Private business investment was adversely
affected throughout the year by fears that the fall labor negotiations could
result in serious disruption of production and certainly would bring higher
labor costs. Consumer spending was held down by the relatively high level
of unemployment. The sluggish economy moderated import demand while
brisk recovery in major foreign markets spurred Italy's exports, generating
a sizable trade surplus in 1972. Undeterred by growing unemployment, labor
intensified its wage demands, contributing to the sharp increase in prices.
By the end of the year, living costs were rising at an annual rate of nearly
8%.
20. Gradual recovery will continue in 1973, with real GNP growing
about 4%. If settlement of the remaining major labor contracts (for example,
the metal workers' contract) comes early in the year, it should remove
considerable uncertainty from the business outlook and help stimulate an
upturn in private investment despite higher production costs. Consumer
expenditures should expand as workers become more secure in their jobs
and spend a larger portion of their wages. Public sector spending will
continue to be somewhat expansionary. The biggest problems in 1973 will
be inflation and pressure on the lira. Aggravated by wage increases and
introduction of the value-added tax system, consumer prices are expected
to rise at least as much as in 1972. Largely reflecting the uncertainties
still surrounding the balance of political forces in Italy, pressure against
the lira may be expected to continue despite the prospect of another large
current account surplus this year.
The Netherlands
21. The Dutch economy, virtually stagnant during 1971 and much
of 1972, has begun to show some signs of recovery. Revived consumer
spending and rising foreign orders have spurred industrial production.
Investment, down sharply earlier in the year, also has increased markedly
in recent months as businessmen assess their domestic and foreign sales
prospects more optimistically. Real economic growth for the year was
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approximately 3.5%. Inflation and unemployment remain major problems.
In the absence of a firm government anti-inflationary policy - itself a
reflection of political instability - price increases accelerated during the
year and the cost of living rose about 7.5%, one of the highest rates in
Western Europe. Unemployment also rose, averaging 3% of the labor force,
a very high rate by Dutch standards and nearly double the rate in 1971.
22. Recovery is expected to accelerate during the coming months.
The government forecasts 4-1/2% real growth for GNP. Industrial production
should rise significantly, aided by greater economic momentum in West
Germany and other principal trading partners as well as by increased
domestic business investment. The unemployment problem may ease slightly
in the course of the year, but unless wage increases are brought under
control - unlikely regardless of what new government coalition will be
formed - inflationary pressures will intensify.
Norway
23. Led by a revival of export demand, Norway's economy overcame
a weak start to grow by 4.2% in real terms during 1972. A cyclical upturn
in foreign demand for pulp,, paper, and -metals combined with a moderate
increase in consumer expenditures to reverse the slowdown which had
reduced the growth of industrial production to 2% in the early months
of 1972. Reflecting a tightening profit squeeze and uncertainties regarding
Norwegian membership in the EC, industrial investment was down nearly
4% from 1971. Unemployment remained low. Spurred on by wage increases
exceeding 12% annually during 1970-71, inflation remains a major problem,
with consumer prices rising 7%. This inflation, felt mainly in the area of
retail prices, contributed to the early weakness of consumer demand.
24. The recent upswing is expected to continue, led by a revival of
investment expenditures, strengthening consumer demand, and buoyant
exports. Real economic growth for the year is expected to reach 4%-5%.
The moderation in wage settlements for 1973-74 should help reduce the
increase in living costs to a more reasonable 5%.
25. The cyclical downturn in the Swedish economy bottomed out
in mid-1972. Government pump-priming expenditures, incentives for
industrial investment, and rising export demand for lumber, paper, and steel
turned the stagnation of the first six months into a modest recovery. Real
growth of GNP exceeded 2%, compared with virtually zero growth in 1971.
Despite the recovery, industrial production failed to grow, as producers
dipped into inventories to supply their demands. Consequently
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unemployment - about 3% of the labor force - continued to be an
embarassing problem for the socialist government committed to a full
employment policy. Reflecting this high rate of unemployment (by Swedish
standards) and the related increase ir savings out of income, consumer
demand remained weak. The rise in living costs eased somewhat to 6.4%
in 1972, compared with a 7.3% rise in 1971. Export prices, however,
remained unchanged, leaving Sweden in an improved International
competitive position.
26. Prospects for 1973 are for real GNP to grow about 4%. Increases
in government spending, rising industrial investment, and some inventory
building, along with, strong export demand, are the leading forces in this
continued modest recovery. The employment picture is not expected to
improve significantly, because productivity gains are likely to match a
modest rise in industrial production.
27. The mild two-year cyclical downturn in Switzerland has bottomed
out. Since mid-1972 the economy is showing increasing signs of renewed
vitality. Private consumption, government expenditures, and residential
construction were the main props of the economy earlier in the year. More
recently, industrial investment and exports have also picked up. For the
year as a whole, real economic growth was 4.5%, up from 4% in 1971.
The labor market has remained extremely tight, and rising wages, together
with rising costs of imports, have fueled the most severe inflation in Swiss
postwar history. Consumer prices rose 7% in 1972 and are. forecast to climb
by as much as 10% in 1973. In the face of these predictions, the government
intensified its anti-inflation program, further tightening ,edit, restricting
foreign investment tax write-offs, and establishing an unprecedented
wage/price surveillance mechanism.
28. Real economic growth is expected to exceed 4% in 1973,
supported primarily by a further increase in private spending on housing
construction and services. Substantial increases in public expenditures,
especially by cantonal and local governments beyond the control of the
federal authorities, also will have an expansionary impact on the economy,
as will a further rise in export demand. In view of the persisting manpower
shortage and full utilization of productive capacity, inflationary pressures
will intensify, possibly forcing the government to introduce wage and price
controls as a measure of last resort.
United Kingdom
29. Despite strikes that cost Britain more working days than in any
year since 1926, real GNP expanded by about 3.5% - markedly faster than
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In the previous three years, when growth averaged less than 2% annually.
Private consumption, stimulated by governmental measures including an
expansionary budget, led the revival. Fixed investment, however, remained
sluggish during most of the year.
30. Despite faster economic growth, serious problems remain.
Unemployment averaged 3.8% in the first three quarters of 1972, compared
with 3.2% (a rate considered high in Britain) for the comparable 1971
period. Pump-priming the economy produced a record budget deficit and
contributed to rampant inflation. In 1972, retail prices climbed 8% and
accelerated prior to the November freeze on wages and prices, which
followed collapse of tri-partite (government, business, and labor) attempts
to reach voluntary restraints. Moreover, despite the June sterling float, which
has devalued the pound by about 10% relative to its Smithsonian central
rate, Britain's old nemesis, the balance-of-payments deficit, is back.
Speculative capital outflows pushed the official settlements balance into
the red in the second quarter of 1972. In the third quarter, the current
account went into deficit as the trade balance deteriorated. The third quarter
trade results were, of course, distorted by the dock strike; nevertheless,
an underlying unfavorable trade balance is suggested by the deficits posted
subsequently.
31. Continued pump-priming and a possible light investment upturn
should boost growth to 4-1/2% in 1973. Unemployment may decline
somewhat, but inflation and the balance of payments are likely to remain
serious problems. The Heath government is following up its initial 90-day
wage and price freeze with a "Phase II" to last a year. Price hikes resulting
from implementation of the value-added tax and partial accommodation
the EC's common agricultural policy this year will increase the need
for tough restraints. While action on the wage and price front may ease
inflation somewhat, the foreign trade balance will probably deteriorate
further. Exports, benefiting from the lagged effects of the sterling float
and from less rapid rise in production costs, should expand - but not as
fast as imports. Capital inflows, however, probably will offset some of the
current account deficit as international monetary relationships return to
a more normal condition.
West Germany
32. The West German economy fared better in 1972 than had been
generally expected. Widespread fears of a drastic decline in business activity
during the first half of the year proved groundless. A high level of
construction and buoyant consumer spending, as well as the return to fixed
parities following the Smithsonian agreement, helped dispel the gloom in
the business community. With investment and export demand also gradually
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rising in recent months, real economic growth for the year reached more
than 3%. Unemployment remained low, averaging about 1% for the year.
Inflation is the principal problem facing Bonn's policy makers. Despite
restrictive monetary and fiscal measures, the cost of living rose steadily
throughout the year. The consumer price index in December was up 6.5%
from a year ago.
33. Government and business leaders generally predict a sr:bstantial
upturn in the rate of economic growth in 1973 - to about 6% in real
terms. Industry has upped its investment plans, and business surveys show
that consumers, anticipating further sizable wage increases, plan to increase
their purchases of cars and large household appliances. Finally, more. rapid
growth in the United States and other major West German trading partners
promises a rising foreign demand for German products. With private sector
spending accelerating, inflationary pressures are likely to intensify unless
the rise in government spending is curbed or taxes are raised. Brandt now
enjoys a comfortable majority in parliament, but it remains to be seen
whether he will be able to enforce budgetary discipline on federal finances
and enlist the cooperation of state and local governments as well. While
the government may impose selected tax increases in the course of the
year, the Bundesbank undoubtedly will continue to carry the brunt of the
anti-inflation fight. Its ability to tighten domestic monetary policy is limited,
however, by developments in the principal foreign money markets. Rising
interest rates in the United States in the course of 1973, as now appear
likely, should increase the effectiveness of the Bundesbank's anti-inflationary
policies.
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