Happier days are on the way as US sets pace in recovery: Britain hopes to follow the American upturn, as recession catches up with Germany
Sunday 06 December 1992
The US is not quite booming again yet but to be caught in the press of the Christmas shopping crowds in Manhattan last week, you might have believed it.
'Happy days are here again' goes the theme song of the Democratic Party. There's no denying it - Bill Clinton is a very lucky man. After a false start last May that cost his opponent the election, a genuine recovery - albeit a modest one - seems to have taken hold in the US, generating enough money and jobs to sustain itself and his election promises.
Even in the UK, after all the false dawns of the last two years, there appear to be faint stirrings. Britain went into recession at the same time as the US, while the Continent was still buoyant. Now the optimists are hoping the UK may start recovering with the US as the Continent heads into recession.
On Friday, hopes of an upturn were buoyed by figures showing a 6.3 per cent increase in November in new car sales and a 15.3 per cent rise in commercial vehicle registrations.
For the first time since Britain's withdrawal from the ERM, the pound was also beginning to show renewed strength in the foreign exchange markets reflecting, according to Norman Lamont, the Chancellor, growing international confidence in Britain's future.
Some of the gain the pound showed last week against the mark may have been technical - closing off short positions ahead of the year end. But with the German economy showing real signs of sinking into recession and what is left of the ERM close to cracking under the strain of currency speculation, the pressure for European-wide reductions in interest rates is growing.
Evidence of renewed confidence in business is still hard to find but, for the markets at least, there is a firm belief that better times lie ahead.
Mr Clinton's advisers spent much of last week trying to play down statistics suggesting that a truly robust US recovery is already under way, warning against looking for 'a false dawn'.
But in the busy lobby of the old Pan Am building in midtown Manhattan last week, lines formed outside the offices of Dreyfus Corporation, a marketer of unit trusts. Individual investors said they were anxious to cash in on 'the Clinton rally' that boosted share prices to record levels on Friday.
After three consecutively bleaker Christmases - each marred by rumours of bankruptcy by a national department-store chain - Americans were out buying gifts again last week, seemingly comfortable in the knowledge that their jobs are likely to still be there next month when it is time to pay the credit-card bills.
That may come as news to the 18,000 General Motors car workers laid off on Thursday, or to the tens of thousands of people who have lost their jobs at IBM, Digital Equipment, Wang and other computer makers. It is also a surprise to much of California, where cutbacks in defence spending and a glut of expensive property have created, in the words of one manager, 'an oversupply of commercial office buildings and an undersupply of jobs'.
But statistics released on Friday, showing another decline last month in unemployment to 7.2 per cent, suggest that the wide publicity given to redundancies at GM, IBM, Boeing and other big employers is misleading. A steady stream of hiring by smaller American businesses continues to create enough consumer buying power - and confidence - to keep the recovery alive, despite their continuing difficulty in securing business loans.
Entrepreneurs and consultants report that their phones are ringing off the hook, but say their bankers remain overly cautious about lending them money.
By all measures, consumer confidence - a combination of the hopes placed in the new Administration and declining fears of being sacked - rose sharply last month.
'A lot of this is psychological,' said Jerry Della Femina, a New York advertising executive. 'America talks itself into recession, and Mr Clinton's victory is a chance for us to talk ourselves out.'
But economists acknowledge that the re-employment of the millions who lost their jobs under President Bush is proceeding far more slowly than one might expect in a convincing recovery - 105,000 in November, instead of 300,000.
Job growth is traditionally a 'lagging indicator' of recovery, they say, because employers are wary of committing themselves to new staff too soon. Friday's rise in the productivity of the average US worker suggests companies are choosing instead to work existing employees longer and harder.
American companies say they are opting to modernise rather than hire, and recent figures show that spending on computers and other hi-tech business equipment has risen sharply.
Better productivity may be the key to higher wages for US workers, particularly when America's main trading partners are either mired in recession or headed in that direction, and export markets are likely to become tighter. But many economists warn that the growth rate reported at Thanksgiving - almost 4 per cent - cannot be sustained unless more Americans are employed.
A productivity-driven recovery might keep the US economy ticking over at growth rates under 3 per cent, a prospect which pleases investors worried about inflation. But a long, slow recovery that creates few new jobs would be hard for Mr Clinton to justify, after having campaigned heavily on putting America back to work. Many economists say the optimism of the past two weeks is misplaced, and that growth rates for the final quarter of the year - due to be published just after Mr Clinton's inauguration in late January - will come in under 3 per cent.
At that rate, estimates Paul Krugman of the Massachusetts Institute of Technology, it will take more than three years for the US unemployment rate to fall below 6 per cent.
But while America begins to celebrate cautiously, European economies are turning sour - and Germany may become the sourest of all.
Today, Europeans are fuming at Helmut Schlesinger who, having moved up from deputy Bundesbank president to president last year, has played a key role in forcing German rates up to post-war peaks during the past five years. With European recessionary forces daily gathering strength, Mr Schlesinger is being characteristically stubborn in lowering rates.
Many, including the German Government, believe this is doing unneccessary damage to the economy. Both Helmut Kohl, the German Chancellor, and Jurgen Mollemann, the economics minister, have recently admitted that Germany is already in recession.
Signs of recession are multiplying rapidly. Real gross national product slumped 1.5 per cent in the third quarter of this year. Since then, industrial output has dropped sharply. Unemployment is mounting, and officials forecast it will top 3 million across Germany next year.
Currently running at 3.7 per cent, inflation is set to top 4 per cent in January, making it among the highest in Europe.
The money supply, meanwhile, is still expanding rapidly. Though much of the recent growth may be due to currency intervention, the Bundesbank cannot be too sure. Huge sales of marks for foreign currencies last September boosted domestic liquidity to such an extent that money supply growth is now racing ahead at a 10.2 per cent annual rate.
As the central pillar of the European economy, Germany's problems mean trouble elsewhere in Europe.
In France, recent worries about the franc mean that interest rates have to be held higher than those in Germany. Because inflation is lower in France, real interest rates stand at 8.5 per cent, compared with just 5 per cent in Germany. That is a crushing burden for French industry.
Economic problems are also prompting doubts about the future of the ERM and even of Germany's commitment to the currency system (see below). But Europe may be lucky if the US is indeed heading for recovery. Its buoyancy would provide some counterbalance to the downswing on the Continent and help limit the depth of the recession there.
Not that these considerations are uppermost in the minds of the shoppers in Manhattan. For them, the prospect of job security and renewed confidence in the future is enough to cheer about this Christmas.
(Photographs and graph omitted)
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