OECD economic outlook. 23.

141 Pages·1978·21.733 MB·English

by  OECD

OECD
ECONOMIC
OUTLOOK
23
JULY 1978
7~
OECD
ECONOMIC
OUTLOOK
23
JULY 1978
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
TABLE OF CONTENTS
v. THE ECONOMIC OUTLOOK TO MID-1979
1. DOMESTIC DEVELOPMENTS
1. Demand, Output and Employment
16. Fiscal and Monetary Policies
23. Wages, Costs and Prices
33. INTERNATIONAL DEVELOPMENTS
33. Foreign Trade and Current Balances
44. International Monetary Developments
57. DEVELOPMENTS IN INDIVIDUAL COUNTRIES
57. United States 72. France 87. Italy
62. Japan 77. United Kingdom 91. Other OECD Countries
67. Germany 82. Canada
98. TECHNICAL ANNEX
98. Detailed Supporting Tables
104. OPEC and Non-oil Developing Countries
113. Sources and Methods
Included in the accompanying
issue of Occasional Studies:
Budget indicators
The international competitiveness of selected
OECD countries
CONVENTIONAL SIGNS
S US dollar Irrelevant () Figures based on incomplete data
c US cent Decimal point I Break in series
£ Pound sterling I, 11 Calendar half-years In charts:
Data not available Ql, Q4 Calendar quarters S , Strike
0 Nil or negligible Billion Thousand million B Break in series
LIST OF TABLES AND CHARTS1
TABLES
Page Table Table
1 1 Growth of real GNP in the OECD area 52 30 Balance of payments summary
3 2 Growth of real GDP in other OECD countries 53 31 International liquidity: summary table
3 3 Development of final domestic demand in seven major
countries
7 4 Contributions to changes in real GNP/GDP
S 5 Factors affecting real private consumption in seven 98 32 Appropriation account for households: United States
major countries, 1976-1978 98 33 Appropriation account for households: Japan
10 6 Manufacturing capacity utilisation rates 98 34 Appropriation account for househoids: Germany
13 7 Unemployment rates in selected OECD countries: 98 35 Appropriation account for households: France
national definitions 98 36 Appropriation account for households: United Kingdom
14 8 Adjusted unemployment rates in selected OECD 98 37 Appropriation account for households: Canada
countries 98 38 Appropriation account for households: Italy
14 9 Employment and productivity 99 39 Comparison of consumer prices and GNP/GDP deflators
16 10 Summary of principal domestic monetary measures in 99 40 Exchange rates of OECD countries
OECD countries, December 1977-May 1978 100 41 Effective exchange rate changes of OECD countries
17 11 Monetary aggregates. Recent trends and targets 100 42 Volume of imports of major OECD countries and
17 12 General government net lending on a S.N.A. basis country groups
18 13 Primary impact of budgetary changes in selected OECD 100 43 Volume of exports of major OECD countries and
countries 1975-1978 country groups
19 14 Employment supporting measures in selected OECD 101 44 Foreign trade volumes of selected other OECD countries
countries 101 45 Market growth and relative export performance of
23 15. Index of non-oil commodity prices selected OECD countries
26 16 Hourly earnings in manufacturing 101 46 Foreign trade prices (average values) of major OECD
26 17 Unit labour costs in manufacturing countries and country groups
30 18 Consumer prices 101 47 Foreign trade prices (average values) of selected other
32 19 Private consumption deflators in seven major countries OECD countries
32 20. GNP deflators in seven major countries 102 48 Trade balances of major OECD countries and country
33 21 Industrial output and trade in the seven largest OECD groups
countries 102 49 Trade balances of other OECD countries
35 22 Total output and foreign trade of the OECD area 102 50 Current invisible transactions of major OECD countries
36 23 Domestic and foreign trade prices of the OECD area and country groups
38 24. Components of OECD trade balance changes 102 51 Net imports of oil of major OECD countries and
39 25. Current balances of major OECD countries and country country groups
groups 103 52 OECD countries' exports to OPEC
40 26 Current balances of other OECD countries 103 53 Spot prices of non-oil primary commodities
42 27. World current account 103 54. OPEC's current balance
48 28 United States balance of payments: recent developments 104 55. Balance of payments of non-oil developing countries
51 29. Oil exporting countries: estimated cash surpluses and
their deployment
CHARTS
Page Chart Page Chart
2 A. Industrial production in seven major countries 47 P. Germany, Japan and Switzerland: relative exchange rate
4 B. Selected indicators of orders evolution, current account positions and changes in
5 C. Selected indicators of stocks of manufactures net official reserves
6 D. Retail sales 50 United States-Germany: interest rate differentials and
9 E. Household savings ratios bilateral exchange rates
11 F. Indicators of corporate financial positions 54 International official liquidity
20 G. Monetary management and interest rate trends 55 International official liquidity, money supply and inflation
24 H. Index ofnon-oil commodity prices in $ terms
25 I. OECD industrial production and spot commodity prices TECHNICAL ANNEX
29 J. Cost and price indicators
31 K. Change in consumer prices 106 T. Effective exchange rates
34 I,. Volume of trade of the seven major OECD countries 109 TJ. Exchange rates against the dollar
37 M. Measures of relative competitive position 111 V. Foreign exchange rates of major currencies
41 N. Current balances of selected OECD countries 112 W. Uncovered interest rate differentials
45 O. Effective exchange rates: recent developments
1. Tables and charts included in country notes are not listed.
The cut-offdatefor information
used in the compilation oftheforecasts
was 12th June 1978.
THE ECONOMIC OUTLOOK TO MID-1979
The economic situation that OECD Ministers discussed in mid-June, and which
confronted theBonn Summit a month later, showedmany ofthe less-favourable im¬
prints ofrecentyears: slowgrowth ofoutput and trade; high unemployment; continu¬
ing inflation; a very lop-sidedpattern ofpayments imbalances andrecurrent bouts of
monetary instability; weak investment; and a generally low level ofconfidence. In
addition itwasclearthat, in thefaceoftheseproblems,governments wereincreasingly
resorting to special intervention policies to support employment and output in
particularsectors andtoprotect homeindustryagainstforeign competition. Recognis¬
ing the disappointing record, and the costs and dangers ifit continues, the OECD
Ministerial meeting agreed that,for the area as a whole, there was a clear need to
create the conditions in which economicgrowth can besteppedup andunemployment
reduced. The programme of concerted action adopted to this end specified
simultaneous action in a number offields, includingpolicies to reduce inflation, to
secure betterpayments balance, to maintain an open market-orientedsystem, and to
reduce the dangerofnew energy crisis, as wellas to raise the levelofdemand. Atthe
subsequent Summit in Bonn more detailed intentions were described in respect of
certain strategic elements in this programme.
This introduction to OECD Economic Outlook, No. 23 starts by presenting,
briefly, the Secretariat's views on theprospects up to this time nextyear ifnopolicy
changes were made. They bear witness, clearly enough, to the need to implement the
programme which theMinisters laiddown. To illustrate in more detail theproblems
thatgovernments had in mind when the discussions tookplace, itgoes on to describe
some ofthe dangers attending continuedslow growth but also to summarisesome of
the reasons whygovernments have oftenfeltconstrainedin the choiceoftheirpolicies.
It ends with some reflections on how concerted action can lift the economies of
Member countries out of their recent grooves by boosting confidence in growth
prospects and allaying expectations of inflation. The intentions announced by the
countries participating in the Bonn Summit will help to produce these effects, and
make theprospects brighter than thepresentforecasts, ifparliamentary andpublic
support enables them to be translated quickly into action.
Short-term The tendencies observable when the bulk ofthis Survey was written (late-June),
prospects and the policies then in place, gave small prospect ofbetter economic performance,
overall, during the rest ofthis year and into 1979. With certain exceptions, this is as
true for recovery as it is for price performance and external payments positions.
In the absence ofpolicy changes, GNP growth for 1978 for the area as a whole
seems likely to stay around 3Vi percent aboutthe same aslastyear withthegaps
betweenpotential and actual outputvarying greatly among countries. The slowdown
observed early this year seems likely to give way to some temporary strengthening in
demand, reflecting the rebound from the influences of strikes and unfavourable
weatherin early 1978 intheUnitedStates andGermany, theimpactoffiscal stimuliin
Japan and Germany, and a less restrictive policy stance in the smaller countries as a
group. But it is unlikely that, after these effects have been exhausted, they will be
followed by an autonomous risein private-sector demand. The deceleration atpresent
forecast in the first halfof 1979 may be considered appropriate for theUnited States
but not in most other cases. The volume ofOECD tradethis year andinto 1979 may
continue to grow by no morethan the modest 5 per centrecorded in 1977 (compared
with a long-term average expansion of 8 per cent per annum).
vi THE ECONOMIC OUTLOOK TO MID-1979
Summary ofoutput and demand forecasts
Percentchanges, annual rates
RealGNP
From previousyear From previous half-year
1975 1976 1977 1978 1977 1978 1979
II I II I
Total OECD -1 5i 31 31 3 31 4 31
ofwhich:
United States -u 6 5 a 5 n 41 3
Japan 21 6 5 51- 31 6k 54 41
Germany -21 51 21 2\ H 2i 31 2|
Total OECD Europe -li 41 2 n 1 21 3 3
Final domestic demand
Major 7 1 41 31 31 31 31 4 31
o/"wA/c/i:
United States -Ü 5 51 31 51 3i 3i 21
Japan 3 4 31 51 4 6i 61 51
Germany H ->4 21 21 21 2i 41 3J
Inflation prospects are still, with few exceptions, high by historical standards.
Eventhoughtheratehasbeen comingdowninthecountrieswhererecentlyithasbeen
worst, for the area as a whole inflation is still running at about 7 per cent ayear. The
danger that, in the United States, it may be increasing without ever having been
brought down to the rates achieved by the more successful countries is particularly
disturbing. The price rises forecast for most countries reflect, in large part, the growth
ofwage rates and, in some cases, lagged effects ofpast currency depreciations; com¬
modity price movements are expected to remain weak throughout the rest ofthe year
and into 1979.
Summary ofprice forecasts
Percentchanges, annual rates
Consumerprices"
Frompreviousyear From previous half-year
1975 1976 1977 1978 1977 1978 1979
II I II I
Total OECD 10£ 8 8 7 61 71 71 7
ofwhich:
United States 8 51 51 7 5i 71 7 71
Japan 11 St 71 5 51 5 51 51
Germany 6 Ai 4 3 31 2i 31 3
Total OECD Europe m 10 10 8 9 li 81 71
a) Orprivateconsumptiondeflators.
Helped by some further gains from theterms oftrade,OECD's externalcurrent
account deficit seems likely to be reduced from aroundS32 last year to aboutS 15 to
$20billionin 1978, andto continue at much the samerateinthefirsthalfofnextyear.
But within this lower total, not much improvement is foreseen in the very uneven dis-
SHORT-TERMPROSPECTS vii
tribution of the imbalance between individual OECD countries. During the year to
mid-1979, a current account deficit of around $20 billion seems likely both for the
United States and for a group of smaller countries. On the other hand, surpluses
around$30 billion seem likely to be shared,,very unequally, between the now almost
traditional handful of strong-currency countries (Japan, Germany, Switzerland,
Belgium and the Netherlands), reinforced byItaly and theUnitedKingdom. Such im¬
balances can probably be financed by capital flows without serious further dis¬
turbances in foreign exchange markets ifclearprospects oftheirprogressivereduction
emerge; but this will depend on developments in many fields, ranging from com¬
parativedemandtrends, monetary conditions and costmovements on the one hand to
policies affecting imports and energy consumption and supply on the other.
Current balances
S billion: includingofficial transfers
1974 1975 1976 1977 1978 1979 I
Total OECD -33 -61 -241 -32 -17 -17
ofwhich:
United States -2.3 11.6 -1.4 -20.2 -25 -18
Japan -4.7 -0.7 3.7 11.0 171 13
Germany 9.8 4.0 3.8 3.8 5 3
OthermajorEuropean
countries -22.4 -4.5 -10.4 -0.6 4 51
Benelux-Switzerland 3.0 4.9 6.2 3.4 6 Si
OPEC 61 29 39 34 19 lo
Non-oil developingcountries -24 -391 -261 -261 -38 -391
Unemployment trends are particularly hard to forecast given the recent unusual
behaviour of both employment and the labour force: despite the sluggishness of
demand, both grew last year at one ofthe highest rates recorded over the past two
decades. Although in absolute terms it has shown little change, unemployment as a
percentage of the labour force has fallen in most of the larger countries since the
middle of last year. This has reflected employment-supporting measures in Europe,
relatively rapid GNP growth in the United States, and a general slowdown of
productivity growth. The course ofunemployment over the next twelve months may
depend crucially upon productivity growth. On the essentially technical assumption
thatproductivity grows somewhatfasterthanin 1977,butbelowthelonger-termtrend
Unemployment rates, estimates and forecasts
Percentofcivilianlabour force, seasonally adjusted
1977 1978 1977II 19781 1978 II 19791
Total OECD» 51 51 51 5 51 51
ofwhich:
United States 7 6 61 6 61 61
Japan 2 2 2 2 2 2
Germany 41 41 41 41 41 5
Total OECD Europe" 5 51 51 51 51 51
a) Representingover90percentoftheOECDlabourforce. Arateof5percentrepresentsapproximately15million
unemployed excluding Portugal and Turkey; includingthese countries thenumberunemployed is about 17million.
b) ExcludingPortugalandTurkey.
viü THE ECONOMIC OUTLOOK TO MID-1979
rate, and on the assumption of little change in average hours worked, employment
may increase only slowly in the periodto mid-1979. Takentogether with little change
in participation rates, this would imply an increase ofmore than halfa million in the
number of unemployed in the OECD area as a whole.
This assessment applies only to the outcomelikely ifpolicies remain broadly un¬
changed. Within the limits of this approach there are a number of uncertainties, of
which the biggest is probably howprivate demand willbehave in thefirsthalfof 1979
when theeffects ofthis year'sfiscal stimuli in anumber ofcountries beginto wearoff.
In the course of the present calendar year, public expenditure seems likely to
accelerate, contributing about3A ofapercentage point toGNP growth compared with
a Vi percentage point in 1977, with particularly strong increases inJapan and Ger¬
many and arelaxationofthetightexpenditure stanceintheUnitedKingdom. Theout¬
look for the first halfof 1979 is more uncertain. A number ofcountries have not yet
announced their budgets. Butthe slower growth ofpublic expenditureproposed in the
United States Federal budget for 1978/79, together with similar developments in
Japan and Germany, suggest a substantially smaller contribution by the public sector
to demand in the area as a whole in the first halfof 1979. In the private sector, some
rise in the savings ratio and a fall in the stock/output ratio towards trend values are
already incorporated in the forecasts. But in the United States, in particular, the
growth ofprivate consumption couldturnoutlowerthan forecastbecauseofinflation.
And major uncertainties liein businessfixedinvestment. A recoveryin somecountries
in orders for plant and equipment in the latter part of 1977, improved liquidity
positions and better investment survey results point to some pick-up in the course of
1978. But the recovery may taper offin the first half of 1979, proving even weaker
than expected and concentrated on rationalisation and replacementrather than on ex¬
pansionofcapacity. On balance, giventhepolicies in place atthe end ofJune, growth
is more likely to fall short of the present forecasts than to exceed them.
The problems of The OECD Ministerial Meeting in mid-June showed clear recognition by all
slow growth. governments that very difficult problems will arise ifthenecessary conditions for self-
The constraints on sustaining growth at significantly higher rates than recently cannot be restored. Con¬
acceleration tinuing slow growth would depress income and profit prospects, and hence could in¬
tensify conflicts over income shares. There would be growing pressure for further
protection both at the frontier and, at home, in the form of defensive practices to
maintain employment at the expense of productivity practices which put upward
pressure on costs and invite inflation to accelerate. Unemployment would be likely to
remain very high until such time as the trend rate of productivity increase
was perhaps permanently adjusted downwards. Adaptation to lower rates of
growth and productivity might be extremely difficult for OECD countries to
accomplish smoothly within an open, market-oriented, system: increasingly severe
problems in particular sectors, requiring growing public intervention in the running of
individual industries and firms, would probably be experienced. Above all, perhaps, is
therecognition that, giventhedemands for social progress inOECD countries andthe
needs for world-wide economic development, the sacrifice ofwealth creation involved
in slow growth would not be appropriate. The problems resulting from slow growth
would impinge especially on the less-developed countries inside and outside OECD
who are dependent on a faster increase ofworld trade ifthey are to realise their own
growth plans and reduce unemployment. But the experience of the last decade
suggests that there is probably no royal road back to higher growth. Governments
face constraints on their policies. And private sector reactions to government policy
are uncertain.
THE PROBLEMS OF SLOW GROWTH. THE CONSTRAINTS ONACCELERATION ix
The existence of a considerable margin of slack in most countries and sectors
suggests thatphysicallimits are not atpresentthe cause ofslow growth. Moreover, it
seems likely that, iftheproductive investment consistentwith economicrecoverywere
forthcoming, the medium-term growth of OECD " potential" output might average
around 4 per cent per year implying for most countries rates ofincrease close to
those experienced in the 1960s. Potential rates ofproductivity increase may well be
somewhat lower than earlier, but there would seem to be no fundamental change in
preferences that would indicate a sharp reduction in the supply of labour or in the
desire for gainful employment. To date, however, the combination of government
action and theprivate sector's responsethereto has notbeen sufficient, inthe areaas a
whole, to bring about a marked reduction in the degree of slack. And governments
have, in the face ofthis situation, been hesitant to take further action to spur demand
because of the possible effects on inflation, on public sector balances and on the
balance ofpayments, and because ofthe desire in the case ofa number ofcountries
a very appropriate one to see any stimulus confined to productiveinvestment or ex¬
port demand.
Partly because of doubts concerning the nature ofthe inflation/unemployment
trade-off, there is widespread concern that a substantial stimulus to demand would
quickly resultin a re-acceleration ofinflation. Moreover, in someMember countries a
more expansionary policy may bebeing heldback by fears ofgenerating expectations
in the private sector ofa subsequent" anti-inflation backlash" which might make any
such policy ineffective or even counterproductive. Doubts concerning the
relationship between unemployment and inflation have certainly been one ofthe most
difficult problems facing policy-makers in recent years.
If there is no longer-run trade-off between inflation and unemployment, and if
policies aimed at stimulating employment can succeed only in the short run and will
lead ultimately to higher inflation, it will be appropriate to give priority to fighting in¬
flation in order to raise employment subsequently.
Recent evidencefor some countries, however, may suggestthatin the longer run
there is sometrade-off, eventhoughvariations ingeneraldemandconditions mayhave
a smaller influence on inflation than assumed earlier and may take effect only with
long time-lags. According to this view, wage and price formation is dominated by in¬
ertia both in wage bargaining and where pricing policies depend on longer-term
seller/customer relationships and rely heavily on normal costs.
A third view is that there is no stabletrade-off, but rather dueto expectational
thresholds a discontinuous relationship. Thus, high rates of slack and inflation can
co-exist over extended periods of time, but a sufficiently sharp increase in un¬
employment may produce a significant impact on prices; conversely, attempts to
reduce unemployment rapidly can lead to sharp increases in the rate ofinflation. In
this view, once certain rates of unemployment and inflation become established the
actual levels may cease to have much effect, but deviations from the established rates
(and the speed with which such deviations occur) will have important influences.
A variant ofthis argument, and onewhich strikes atthe very heart ofthe theory
ofthe effectiveness offiscal stimulus, is that the effect ofan increase in demandonthe
rate ofinflation depends in part at least upon the source ofthe demand increase.
In this view, if the increase in expenditure arises from " natural" growth of private
demand, the inflation rate maybelittle affected,but"forced" growth secured through
policy action would accelerate inflation, partly atleastbecausetheassociatedincrease
in the public sector deficit would generate an adverse effect upon expectations, reduc¬
ing private spending propensities.