Weak World Recovery

President Ford's tour through Europe last week gave him no holiday from economic worries. During long meetings in Bonn, West German Chancellor Helmut Schmidt urged the U.S. to coordinate economic policy more closely with Europe and specifically to avoid any restrictive moves, such as raising interest rates, that could damage the chances for recovery abroad. Later, during the 35-nation European Security Conference in Helsinki, French President Valery Giscard d'Estaing took Ford aside to restate his well-known position that a return to normal economic growth will not be possible without a thorough monetary reform leading to fixed exchange rates for currencies. British Prime Minister Harold Wilson, who now faces sharply rising unemployment (July rate: 4.2%) as well as a 26% annual rate of inflation, expressed the hope that improving prospects in the U.S. would boost his country's sagging economy. The Europeans' concern reflected not only the growing economic interdependence of the world's industrialized nations but their declining hopes for a rapid recovery from what has, outside the U.S. also, been the deepest and longest recession since World War II.

The slowdown abroad, to be sure, has been milder than the U.S. recession. Yet as the U.S. economy shows ever more vigorous signs of reanimation, no similar trend is immediately visible in Europe. In the past few months, nearly every government has revised its 1975 growth forecasts downward. The main reason: West Germany's economy, which accounts for fully one-third of the European Community's gross national product, has failed to respond to the expansionary program of tax credits and deficit spending launched by the government last fall. Unemployment is holding at record postwar levels (4.4% in June), inflation has begun to rise slightly (to a 6.4% rate), and exports for the first five months of this year have fallen 16% from a year earlier. The simultaneous slowdown in all the world's major economies has caused world trade to decline at an annual rate of about 12% in the first half of 1975--the first drop in more than 20 years.

The industrial nations do expect some sort of recovery. The Paris-based Organization for Economic Cooperation and Development has predicted a turnaround in West Germany before year's end, a view shared by Bundesbank Vice President Otmar Emminger. Of the world's major economies, said the OECD, all but Britain and Italy will enjoy real growth in the second half, a trend that will accelerate sharply in 1976 (see chart). To make sure it happens, Schmidt and Giscard agreed a fortnight ago on a joint $5.5 billion pump-priming effort ($2 billion to be spent in Germany, $3.5 billion in France). Japanese Finance Minister Masayoshi Ohira has also promised further steps to stimulate demand. Yet as welcome as that news may be, it will mean little to the 15 million jobless in Europe, Japan and North America. Global unemployment, according to the OECD, will not begin to decline until mid-1976, and it may rise further before then.

Some Doubt. Moreover, the OECD warns, in most countries outside of the U.S. the recovery will be so weak that "there must be some doubt whether it will prove self-sustaining." Inflation may settle at around 6% in the U.S. and West Germany, but elsewhere it will remain higher. In France it should level off at around 9% early next year, in Italy 12.5%, in Japan 8.5%, and in Canada 8%. If Harold Wilson succeeds in curbing the extravagant wage demands of his country's unions, Britain's rate could be reduced to 10% in 1976.

For the moment, other nations can take comfort from the fact that the U.S. will be cooperating with their stimulative plans, though not necessarily by design. If growth forecasts, now in the 7% to 8% range for the fourth quarter, prove correct, the U.S. recovery should spill over, through trade, more rapidly than expected--especially to Canada. Europe should also get a special boost from the spectacular and generally unexpected recovery of the dollar on foreign exchange markets. Reacting to rising interest rates in the U.S., foreign exchange dealers have bid the dollar up 7% to 8% against the major European currencies since the beginning of July. For Europeans, that means at least a temporary dulling of the competitive edge that helped push the U.S. trade surplus to a one-month record of $1.7 billion in June.

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