OECD economic outlook. 2.

97 Pages·1967·15.037 MB·English

by  OECD

ORGAN E C 0 N 0 W 0 t V B I 0 P W t N t
ORGANISATION DE COOPERATION H DE ECONOMIQUES
DECEMBER 1967
OECD ECONOMIC OUTLOOK - DECEMBER 1967
Corrigendum English version only
Chart C on page 13 and Chart F on page 26 should be replaced by the
attached revised versions.
Page 19: United Kingdom. The second sentence starting at the bottom of
the left-hand column should read:
"The decline in private productive investment in 1967 now looks like
being only about 5 per cent and the latest survey suggested that there
might be some recovery in 1968. "
CHARTC
PRODUCTIVE INVESTMENT IN SELECTED O.E.C.D. COUNTRIES, 1960-70
Projections,estimates,andforecasts (Indexnumbers,1960 =100)
200
180
160
140
100
Japan
United Kingdom
240 / /\0% " 240
/
220 - 220
20D - - 200
3fc%
ISO - - 180
160 -
/ / -
140
France // -
120 / /
- - / /
/ /
/^ZW " - -
1/
- inn l/\ i i i i i i i 1 1
'60 *B1 '62 '63 '64 '65 '66 '67 '68 '69 70
- -
,x Trendprojectedfor1960-70 Productive investments is composée
" " of enterprise investment, including
Actual1960-66 governmententerprises and excluding
residentialconstruction
/// -Forecasts1967-68
Thetrendline forproductive invest¬
mentisan averageoftheactual rate
s'X ofchangefrom1960to1965,andthe
projections made by governments or
theO.EC.D.Secretariatforihe1965-70
periodin"EconomicGrowth. 1960-70,
/-I i i i i i i i 1 1 A mid-decade review ofprospects".
'60 '61 '62 '63 '64 '65 '66 '67 '68 '69 7D
DOMESTIC DEMAND AND TRADE BALANCES
United States E.E.C.
2000
Japan Percent United Kingdom
6
-
/-
*\!
V
illion -
lowpressure \
1400
-
-
/
1000 -
K N^^ 1965 1966 1967 1968'
_
-
< 1. Domesticdemand (deviationfromtrend)
_ 2.O.E.C.D.demand(deviationfromtrend)
wm^a^ÊM^ 3.Relativepressureofdemand(1 2)
JL_ i i I -«^"b^m 4.Tradebalance (Smillion,seasonallyadjusted)
'* Adjusted for removal or import surcharge
196S 1966 1967 1968 * 19672ndhalfand1968:forecasts
ARCHIVES' \
:P"Rt
retol:
OECD
ECONOMIC
OUTLOOK
2
DECEMBER 1967
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
CONTENTS
Economic Prospects after the Devaluation of Sterling (General Summary) (cid:9) 3
GENERAL TRENDS IN OECD COUNTRIES
Demand and Output (cid:9) 7 Trade Balances (cid:9) 24
Current Invisibles (cid:9) 29
The Current Situation (cid:9) 7
Effects ofthe Suez Canal Closure (cid:9) 29
The Outlook for 1968 (cid:9) 8
The Outlook for Individual Countries (cid:9) 9 Monetary Developments (cid:9) 30
United Kingdom (cid:9) 31
Expansion Versus Price Stability (cid:9) 12
United States (cid:9) 33
United States (cid:9) 14 Japan (cid:9) 35
Canada (cid:9) 16 Canada (cid:9) 36
Italy (cid:9) 36
Japan (cid:9) 17
France (cid:9) 36
Italy (cid:9) 18
France (cid:9) 18 Germany (cid:9) 37
Smaller Industrialised Countries (cid:9) 38
Germany (cid:9) 18
United Kingdom (cid:9) 19 International Capital Movements (cid:9) 39
Banking Funds (cid:9) 39
Trade and Current Invisibles (cid:9) 20
Total Capital Flows (cid:9) 41
OECD Imports (cid:9) 20
Balance of Payments Equilibrium (cid:9) 43
Trade with non-OECD Countries (cid:9) 22
Total OECD Exports (cid:9) 24 The Outlook for 1968 (cid:9) 45
DEVELOPMENTS IN MAJOR COUNTRIES
France (cid:9) 47 United States (cid:9) 71
Germany (cid:9) 53
Canada (cid:9) 77
Italy (cid:9) 60
United Kingdom (cid:9) 65 Japan (cid:9) 82
Statistical Annex on New Foreign Bond Issues and New Issues on the Euro-Bond Market 86
Technical Notes (cid:9) 87
CONVENTIONAL SIGNS
S US dollar Irrelevant
c US cent Decimal point
£ Pound sterling I, II Calendar half-years
Data not available Q,q Calendar quarters
0 Nil or negligible Billion Thousandmillion
ECONOMIC PROSPECTS
AFTER
THE DEVALUATION OF STERLING
General Summary
The slowing-down of the growth of activity evident at the beginning
of 1967 has come to an end. In the twelve months ahead (second half
of 1967 to second half of 1968) the combined GNP of OECD countries
seems likely to grow by more than 4\ per cent, as against less than
3 per cent in the previous twelve months. As a result, the value of
imports of OECD countries now seems likely to grow by 8 per cent over
the same period (as against less than 4 per cent in the previous twelve
months). The acceleration of output and trade seems more securely
established in North America and Japan than in Europe.
The devaluation of sterling on 18th November (14.3 per cent) was
followed, among OECD countries, by Denmark (7.9 per cent), Ireland
(14.3 per cent), Spain (16.7)*and Iceland (24.6). The United Kingdom
accounts for 9 per cent of world imports; other devaluing OECD
countries for 4 per cent (and other countries outside the OECD area,
which also devalued in the latter part of November, account for a further
4 per cent).
The effects which the devaluations and the internal measures taken
by the devaluing countries may have on the course of demand in other
countries, and on trade and payments patterns, are discussed below.
THE DEVALUATION OF STERLING
The United Kingdom took the decision to devalue after running
deficits on current account during six of the last eight years to which,
till recent years, was added a substantial outflow of long-term capital.
The Government had sought, since 1964, to correct the imbalance by
reducing demand pressures, by attempting to restrain prices and incomes
more effectively than in competing countries, and by measures to
improve productivity and the structure of the economy. It was realized
that such policies would take time to become effective and that, in the
interval, external assistance would be required. It became progressive¬
ly clear that the delay and sacrifice would be considerable. After the
severe measures of 1966, the balance of payments was slow to respond.
By the early summer it was apparent that the restraint of demand
would push unemployment above the level regarded as tolerable. It is
generally agreed that countries cannot be called on to sustain indefinite
periods of stagnant demand in the interest of the balance of payments,
and that beyond a point other methods of adjustment are called for.r
What is important for the immediate future is that the United
Kingdom authorities should ensure that a sufficient margin of unused
resources exists to enable exports to expand significantly. While de¬
valuation has shifted the external constraint on expansion, the internal
constraint remains; and it may be necessary to restrict expansion to a
rate not very much in excess of the 3 per cent a year at which product¬
ive capacity is estimated to be growing.
Devaluation has given United Kingdom manufacturers a net cost
advantage of the order of 10 per cent. On any normal assumption
about the response of trade to cost and price changes, the benefit to the
trade account should be substantial, and could, over time, even exceed
the Government's target of an improvement of £500 million or $1.2 bil¬
lion. (Excluding purchases of US military aircraft and the impact of
the temporary adverse factors, the current account was probably in
rough balance in 1967. The devaluation could by 1969therefore
lead to a current account surplus of over $ 1 billion.)
As the more detailed note on page 65 of this issue suggests, the
situation contains dangers for the United Kingdom, as well as opportu¬
nities. The improvement in the current balance might well absorb 2
per cent of GDP over the next twelve months. Unless, therefore,
domestic demand is severely restrained, overheating could develop,
pushing up incomes and prices and soon cancelling out the competitive
advantage obtained by devaluation. Since public expenditure and fixed
investment both seem likely to rise, there will be very little room for
any incrase of private consumption. It is widely agreed that the res¬
trictive measures taken in November along with devaluation (see
page 66) will need to be followed, by the time of the budget, by
substantial further measures of restraint if this purpose is to be achieved.
The devaluations in Ireland, Denmark and Spain are also being
accompanied by certain measures of internal restriction.
1. Thelatest internationalstatementon thesubject, afterobserving that:
Countries in deficit should endeavour to keep the rise of incomes within, and if
possiblebelow, therateofproductivityincrease. The appropriate means may differ
from country to country. In some cases, it may be possible to achieve this by
the combined use of incomes policies and steps to encourage the improvement of
productivity. If these policies fail to produce the desired result in a reasonable
period oftime, it may be appropriate to facilitate the operation of incomes policies
by measures which, while preserving reasonable employment levels, are designed to
reduce the pressure of demand.
goes on to say:
It is, however, generally agreed that countries cannot be called on deliberately
to sustain prolonged periods of stagnant demand. There may at times be cases
where the above policies appear unlikely to restore balance sufficiently quickly, and
adjustment of the exchange rate seems appropriate.
andadds:
It should be stressed, however, that this is only likelytobesuccessfulifthenecessary
conditions have been assured beforehand; these include a margin of spare capacity
adequate to provide for an expansion of exports, and a readiness on the part of
those responsible for price and income determination not to seek to evade their
share of the immediate effects ofthe devaluation.
See The Balance of Payments Adjustment Process, a report by Working Party No. 3
ofthe Economic Policy Committee ofOECD,paragraph 46, OECD, Paris, August 1966.
EFFECTS ON OTHER COUNTRIES
Successful devaluation in the United Kingdom and elsewhere will
affect the demand situation and the current balance of payments of the
countries which have not devalued. The depressive effect on demand
of the British devaluation can be measured by the shift in real resources
which occurs in the United Kingdom. As noted above, this could be
of the order of 2 per cent of United Kingdom GDP over the next twelve
months and, if the devaluation were fully successful, could rise to
something like $2.5 billion by the middle of 1969. In quantitative
terms, this is only a very small fraction of the combined GDP of other
OECD countries, which amounted to $ 1,270 billion in 1966, and still
small in relation to the annual increase to be expected. But the effects
will be unevenly spread and will not be negligible for some countries.
As a rough rule of thumb, the volume of exports of other countries
exporting mainly manufactured goods might be reduced by 1-1\ per
cent below the level which would otherwise have prevailed. The exact
amount will vary from country to country according to the import¬
ance of its markets in the United Kingdom, and the extent to which,
elsewhere, it competes in the same markets and same product lines as
the United Kingdom. This could clearly have a considerable impact
on overall demand in countries such as Norway and the Netherlands,
where exports of goods and services account for 40-50 per cent of GDP,
but will have virtually no impact on the United States, where the
corresponding ratio is only 5J per cent.
In a number of the smaller industrialised countries in Europe,
particularly Norway, Swedan and the Netherlands, compensatory ex¬
pansionary action may, therefore, be called for, if a swing in the United
Kingdom's balance of the order envisaged begins to appear. For
Germany and France, the position is less clear-cut. Although in both
countries there has been some pick-up in domestic demand in recent
months, there are certain doubts whether faster expansion will be
sustained through 1968. The direct effects of the devaluations should
be small. But there might be an indirect adverse impact on business
confidence from the unsettled state of international exchange and
financial markets; and if this became apparent, present fiscal plans
might need to be reassessed.
BALANCE OF PAYMENTS EQUILIBRIUM
The balance of payments pattern among OECD countries will
clearly be substantially affected by the devaluations. But the current
balances of the non-devaluing countries will be less affected than are
their internal levels of demand, because the devaluations will improve
their terms of trade. Thus the effect of the British devaluation the
predominant element might be to worsen other countries' current
balances by about $ 1%-Ii billion over the next eighteen months.
A sum of this magnitude, spread between the other OECD indus¬
trialised countries, would not itself present serious problems. But the
incidence is likely to be somewhat uneven; and, in addition, there may
be a considerable impact on international capital movements. First,
there should be a reflux of the massive outflow of highly volatile funds
from London in the months preceding devaluation. Looking further
ahead, there should be a progressive strengthening of confidence in
sterling which, eventually, could have a pervasive effect on other types
of capital movements, in particular direct investment. Taking current
and capital transactions together, the devaluation could in time sub¬
stantially reduce other countries' overall surpluses; and could push
some countries, at least temporarily, into deficit. If this happened, and
if it led many governments to cut back domestic demand to protect
their balance of payments, this might be a clear sign perhaps the first
of a generalised shortage of world reserves.
MONETARY CONSEQUENCES
Before the devaluation, the monetary authorities in the United
Kingdom were faced with relatively weak domestic demand, but had to
resist the pull of rising interest rates in the United States because of the
fragile balance of payments. The situation has now radically changed.
Monetary restraint is needed to support fiscal policy in keeping the
growth of domestic demand within the narrow limits required; and the
maintenance of fairly high interest rates will help to build up confidence
in the new exchange rate. The authorities will, no doubt, wish to
" neutralise " so far as possible, the internal monetary effects of the
substantial capital inflows which may now take place, so as to maintain
a tight grip on domestic liquidity creation and prevent too rapid a
decline of rates (p. 31 below).
Thus the United Kingdom, like, the United States, is now a country
where relatively high interest rates appear appropriate for both domestic
and external reasons. The same considerations in reverse point to the
need, in most other countries in Europe, to keep interest rates low, and,
notably in the case of long-term rates, to continue efforts to bring them
down further. Such an international pattern of interest rates would
also seem appropriate from the point of view of maintaining confidence
in the international monetary system. This, inevitably, was disturbed by
the devaluation of sterling. But granted appropriate policies, a major
element of international monetary instability should prove, as an result
of the devaluation, to have been removed.
The following sections are devoted to an assessment of the outlook
for 1968 in the OECD area as a whole, taking into account as far as
possible the consequences of the British and other devaluations. A
discussion of the benefits obtained from the easing of demand pressures
in 1967, and of the cost, will be found on p. 12. A review of the
monetary developments which have led to a reversal of the earlier fall
in the interest rates is on p. 30. More detailed surveys of develop¬
ments and prospects in the seven major countries are given in pp. 47-85.
2nd December 1967.