GLOOMIER OUTLOOK IN 1987 FOR OUT PUT AND TRADE.

Mar 27, 1987

GLOOMIER OUTLOOK IN 1987 FOR OUT PUT AND TRADE.

GENEVA MARCH (IFDA/CHAKRAVARTHI RAGHAVAN) -- A gloomier outlook, than generally foreseen just a few months ago, is projected for growth in world output and trade in two separate reports made public.

The two independent reports have been issued by the UN's Regional Economic commission for Europe (ECE) in its economic survey for 1986-87, and the General Agreement on Tariffs and Trade in its first assessment of world trade developments in 1986 and preliminary estimates for 1987.

Most 1986 year-end forecasts had suggested a world GDP growth in 1987 of three percent.

The GATT economists normally have the reputation of taking a more optimistic view. But both the GATT economists and the ECE economists appear to agree, on the basis of recent developments, that real output growth in the world is likely to weaken further.

GATT notes that since the 1950's each successive recovery has a tendency to be weaker and shorter than the preceding one, and the world is already in the fourth year of recovery from the recession of 1982.

The ECE suggests that the four-year old economic upswing "appears to be showing definite signs of weakness", and the outlook for 1987 seems mow to be "worse than envisaged just a few months ago".

The GATT Secretariat itself does no projection of its own on world output growth, but often goes by the IMF and OECD projections and forecasts, and uses it for its own trade projections.

The ECE, which does its own projection, has sought to PRMDME details of its own for the ECE region - East Europe, West Europe and U.S.A. and Canada.

For the region as a whole, it now expects real output to be somewhere between 2-1/2 to three percent.

ECE notes that the performance of the world economy in the 1980's has so far clearly fallen short of that required to reduce poverty and unemployment in the world.

Also, given the uncertainties in the present situation "there are increasing doubts as to whether the pace of world output growth in 1985-86 can be sustained in the near future without internationally compatible policy actions in a number of different countries".

ECE advocates "more expansionary fiscal policies" which would directly encourage a higher level of fixed investments, and coordination of such policies at European level.

The prospects of a slower rate of economic growth in the ECE region, the UN's Regional Commission says, is particularly serious for the world economy as there does not appear to be any important offsetting sources of growth outside the region.

"A slow-down in ECE growth would have a negative impact on world trade and this would worsen the already difficult situation of many developing countries", ECE warns.

GATT estimates that the volume of world merchandise trade grew by about 3-1/2 percent in 1986, about the same as in 1985, while the ECE estimates volume growth to be marginally better than in 1985 at about four percent.

GATT expects world trade volume to growth in 1987 by only 2-1/2 percent. The ECE says the outlook for 1987 is less favourable than it did at the beginning of 1986, and the import demand of the OECD economies is not expected to accelerate while that of third world countries is likely to remain weak.

For the ECE the only bright picture in 1986 was the performance of East Europe and the Soviet Union, whose combined net material product (NMP) grew to almost 4-1/2 percent, the highest since 1979.

Prospects in 1987 are for a continuation of pace of growth at about four percent.

ECE notes that among OECD countries in 1986, export growth was more than halved, to below two percent.

This deceleration, it says, reflected the contraction of import demand in the third world and in the centrally planned economies.

In 1986, East Europe's trade surplus in convertible currencies was reduced sharply, and its current account surplus of two billion in 1985 became a deficit of two billion in 1986.

This contributed to East Europe's net debt rising from 55 billion in 1985 to 65 billion in 1986, though even this largely reflected the depreciation of the dollar against other currencies.

The value of world trade, according to GATT, grew by an estimated ten percent in 1986, to reach 2,110 billion dollars.

The increase in world trade value is due to increased volume and depreciation of the value of the dollar - which boosted the dollar value of a substantial part of the world merchandise trade including most of the intra-West European trade, trade between Japan and Western Europe, and that Socialist Countries and China.

World trade in manufactures, according to GATT, registered one of its poorest performances in three decades, rising only three percent in volume (less than total world trade) compared to the 5-1/2 percent in 1985.

Third world countries increased the value of their manufactured exports by 13 percent, and for the first time they earned more foreign exchange selling manufactured goods than selling fuels or non-fuel primary products.

But this too seems to be due to the sharp fall in 1986 of the prices of their exports of fuel and primary products.

And despite the increase in value of their manufactured exports, third world's share in total world merchandise exports dropped from 23 percent in 1985 to 19 percent in 1986 - again largely because of decline in petroleum prices which account for such a large share of their total exports.

Third world's mutual trade dropped in value terms from six percent of world trade in 1985 to five percent in 1986.

The GATT economists suggest that a reason for successive recoveries in the world economy being weaker and shorter is due to the mismatch between adjustment needs and adjustment capacity in the world economy.

And the inadequate pace of adjustment, the economists argue, is due to market rigidities reflecting the extent of trade barriers and subsidization.

However, the other major factor causing market rigidities - namely the oligopolistic nature of the market structures due to the role of TNCS that now account for a dominant share of world trade - appears to have been ignored by the GATT economists.

The ECE report brings out that while material inputs bought by West European manufacturing industry fell in first three quarters of 1986 by nine percent, the final output prices fell much less, only 0.7 percent on average, with increased margins contributing considerably to rise in corporate profits.

But unit profit costs in the economy as a whole was much higher than for manufacturing industry, showing that in other sectors (especially in some service sectors) prices and profits increased much faster than in manufacturing, and perhaps explaining the slower growth of fixed investment in the business sector.

For most of the 16 major indebted countries, 1986 was again a difficult year fro trade, GATT survey says.

Compared to 1985, their combined merchandise trade surplus fell by more than half - from 29 billion to an estimated 13 billion - due to sharply lower export earnings and virtually unchanged imports.

Relative to 1981 (the year before the emergency of the debt crisis), the combined imports of the 16 in 1986 is estimated by GATT to be more than 25 percent, while their exports were off by nearly 10 percent.

Only five of the 16 (Chile, Colombia, South Korea, Thailand and Philippines) managed to increase their exports, while all others (Brazil, Egypt, Mexico, Morocco, Nigeria, Argentina, Indonesia, Peru, Turkey, Venezuela and Yugoslavia) all saw contraction of their exports.

The GATT survey identifies four major risks in the world economy in the period ahead.

Firstly, some West European countries and Japan have still to overcome fully the difficulties in adjusting their patterns of production and employment to the large changes in real exchange rates. Due to this in a number of countries growth forecasts for 1987 have recently been revised downwards.

Secondly, in some other countries, and in the U.S. specifically there is a risk of sizeable increase in inflation due to the combined impact of a rapid expansion of money supply and exchange rate depreciation.

Thirdly, there are now renewed concerns over debt management, both at the international level and at the level of private financial and non-financial flows in some countries.

"Adverse repercussions for the growth of world output and trade could develop rapidly if prolonged strains in that area had a major impact on confidence in financial markets".

Fourthly, there is also the danger that a continuation of the large current account deficit in the U.S. could trigger a tit-for tat escalation of protection, leading to a massive shrinking of markets world-wide.

The GATT economist suggest that any increase in U.S. trade barriers "would have little or no impact on the current account deficit. But would only increase U.S. inflation and reduce world trade".

A substantial and lasting reduction in U.S. trade deficits could come about only through a combination of higher domestic savings (through reduced consumption), lower investment (which means fewer jobs and slower growth), and a smaller federal budget deficit.

The simultaneous existence of unemployment and current account deficit in the U.S., GATT argues, points to the conclusion that the current capabilities of idle workers and underutilized factories do not match pattern of current demand for goods and services.