COMMENT:G7 needs a shared alertness to the dangers
Wednesday 14 June 1995
The economy of the host country, Canada, has weakened dramatically from the fast growth it chalked up in 1994. National output declined in the first quarter. The housing market is as traumatised as the UK's, with new starts over a third lower than last year. Jobs have not grown since March.
Prospects for Canada are intimately linked to those for the US, where there has been a dramatic turnaround in expectations for future growth. The surprise fall in jobs of more than 100,000 in May and the plunge in the National Association of Purchasing Managers' Index have turned hopes of a soft landing into fears of a bumpy one. Output is now expected to stagnate in the second quarter.
Meanwhile, the crisis in Japan shows no sign of abating, as the economy flounders in the unfamiliar landscape of debt deflation. Banks, laden with bad debts, face mounting pressures as the fall in the stock market erodes their capital reserves. Meanwhile, life assurance companies, conscious of the huge currency losses made on former foreign investments, are shying away from the recycling of Japan's excess savings overseas that is needed to pull the yen down.
Continental Europe recovered later than the Anglo-Saxon economies, but there, too, the warning lights are flashing amber, if not red. Leading indicators are pointing down. So, too, are coincident ones. Last month's IFO survey in particular portrayed a worrying decline in its overall business conditions indicator for Germany, from a peak of 106 in November last year to 99 in April. The problem is that the rise in the mark and linked currencies this year has hit growth prospects in Germany and its principal satellites.
Few dispute that world economic growth is decelerating more sharply than expected. What is in question is whether this is a temporary hiatus after which expansion will resume or a harbinger of a more serious relapse.
The optimistic view is that we are seeing a growth pause similar to ones seen in the past. In the US, for example, an inventory correction will quickly work its way through the system and consumer demand will then translate into a resurgence in output. Falling long-term interest rates across the Group of Seven also constitute a powerful restorative.
The pessimistic view is that we are in unfamiliar disinflationary territory. The Japanese experience may be extreme, but all countries are afflicted in one way or another by problems of debt in an environment in which inflation no longer washes away the sins of past borrowing binges. Combine this with chronic job insecurity and there is the danger that a growth pause could turn into something worse as insecure consumers hold back.
Even if the G7 accepted the latter scenario, no one expects co-ordinated international action. But recognition in the final communique that growth prospects are faltering would paradoxically be a reassuring sign. Shared alertness to the danger is likely to bring about a prompter response among the individual industrialised countries if the pessimistic view turns out to be the right one.
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