Economic growth slowed down after the sharp recovery of 1983-1984 and has remained sluggish over the past two years. Now that it is well advanced, the present business cycle does not look very dynamic. An upsurge of inflation has been prevented so far, but both fiscal and foreign deficits have increased so much that they now seem to call for transient and dangerous half-remedies : protectionism, arbitrary freeze of federal spending. The fall of oil prices does have positive effects on the economy, for in the United States as elsewhere it has enabled interest rates to decline and household's purchasing power to increase. Housing and private consumption will therefore fuel economic growth this year. In 1987, budgetary cuts will hamper economic activity and lower the public deficit, but not enough to stop the rise of the debt/Gnp ratio. Private investment, which is already falling in the energy sector, would become even less profitable should the fiscal reform be implemented. It might stay at the present level only if interest rates were to decline further. Despite the recent surge in equipment expenditures, american competitiveness has not fully recovered. Productivity has not increased rapidly enough in the sectors where competition is fierce. The decline of the dollar is not ample enough to enable by itself the current balance to improve significantly. Having reached such a situation, the United States now rely upon other developped countries to pull their own growth through accelerating exports. The alternative to stronger international competition is another fall in the exchange rate of the dollar.
Exports have been rapidly increasing in South Korea and the Republic of China (Taiwan) over the past 20 years. The ratio of exports to GDP has soared, but so has the ratio of imports to GDP. Thus, extemal trade did not provide a direct source of growth before the mid 70's in Taiwan, the early 80's in South Korea. In both countries, the United States and Japan account for more than 50 % of external trade. They are therefore hugely dépendant on the fluctuations of the world economy. Their GDP growth has been hampered in 1985 by the slowdown of world imports. The State is a major agent in the making of économie décisions in both countries. But the stratégies hâve been différent as regards the building of manufacturing industry. The emphasis has been placed in South Korea on large firms heavily relying on capital borrowed in international markets, in Taiwan on small-scale entreprises using mainly national savings. The increase of private consumption has been the main drive behind the growth of GDP and has enabled the standards of living to improve. Producti-vity is still growing faster than real wages in South Korea, but no more in Taiwan since the early 70's. Both économies are progressively shifting towards higher value-added productions, whereas their initial development relied mainly upon a low-paid and abundant labor force. Both économies are faced with the risk of a market slowdown of world imports during the coming 2 years. Conséquences would be harder for Taiwan where private consumption is less dynamic. In the longer run, South Korea and Taiwan will be faced with a more acute compétition from other asiatic nations. They will therefore try to shift further their productive capaci-ties towards higher value-added activities and to enlarge the geographical scope of their exports.
L'instabilité potentielle des pétrodollars avait suscité des craintes relatives à leur recyclage. Mais près de 40 % de ces capitaux ont été investis à moyen et long terme dans les pays industrialisés, les États- Unis accueillant à eux seuls la moitié de ces placements. Un montant équivalent a été déposé dans les banques occidentales, qui l'ont transformé en prêts à moyen et long terme. Le reste a été prêté aux organisations internationales ou directement aux PVD. La contraction des pétrodollars amorcée au début de 1982 s'est jusqu'à présent concentrée sur les dépôts dans les banques non américaines. Au cours des trimestres à venir, elle pourrait affecter les autres types de placement. Cela risque d'amplifier les mouvements de change plus que de réellement perturber les financements internationaux.
The External Trade of the EEC, Japan and the United States : A Comparison Division de l'environnement international du département des diagnostics de l'OFCE The three main poles of world trade are the European Economic Community regarded here as a whole (i.e. after excluding the internal trade between its twelve members), the United States and Japan. The EEC remains the first exporter in spite of the Japanese breakthrough. As far as imports are concerned the United States overtook the Community in 1984 which from then has been in the second position. The EEC directs much less its trade towards the industrialized countries than the other two do. The Community is indeed much more linked to its geographical and economic environment, which can be defined as the remainder of the European continent plus Africa and the Middle East. This area of influence enabled the EEC to record in 1986 (and for the first time in twenty years) an overall trade surplus. The EEC has succeeded in maintaining its market shares on its priviledged zone while the US have managed to avoid any reduction in theirs on their own area of influence. Therefore the buoyancy of Japan and the NIC's have not yet been able to evict the EEC and the US from their respective traditional outlets. However Japan and the NIC's broke through in other ways. They successfully competed with the US on the European area of influence and with the EEC on the United States'. Besides they increased their market shares both in Europe and in the United States. So far the Community has achieved relatively better results in controlling the import growth than it has in promoting exports. Therefore the European external surplus appears frail especially at a time when the dollar exchange rate is low and when the European market is more and more regarded by the US and the Asian countries as the most attractive outlet for the years to come.
Confiscated Growth Département des diagnostics de l'OFCE In 1986 both the price of oil and the exchange rate of the dollar have come back to levels more in line with market equilibrium. But these have not had the expected stimulating effects. The improvements in the terms of trade — particularly large in Europe and Japan -- have slowed down the growth of general government and corporate net debt at a time when many developing countries have been forced to adopt severe financial measures. The flow of capital to the OECD countries has been balanced by a sharp reduction of the demand from the rest of the world, while important losses of market shares were conceded to the newly-industrialising countries. The recovery of private consumption has been significant, but not enough to stimulate investment. An important portion of corporate resources has continued to flow to the financial markets, contributing to keeping real interest rates high. In 1987 and early 1988 the slackening of demand in the United States and then its contraction, will dominate the international environment. In such a context the persistence of the American external deficit will aggravate monetary, trade and financial tensions. Faced with increased external competition and weak world demand, Japan and above all Europe will suffer seriously from any additional drop of the dollar. In France the likelihood of significant growth appears limited. Household consumption growth will slow down because of low wage increases, not fully compensated by a strong growth in non-wage income. The recovery of private investment will accelerate but its pace will remain slower than the improvement in profits. The growth of final domestic demand will tend to benefit foreign more than French suppliers, who are facing hightened competition in domestic and world markets from the South-East Asian countries. The trade balance could turn negative. A 1.7 per cent GDP growth in 1987 will not be enough to stop unemployment from rising. A more expansionist economic policy could curb this upward trend, but there is a continuing risk of any surge in demand being captured largely by foreign competitors. expected slowdown of household consumption, the near-stagnation of investment, and the weakness of exports. Destocking following involuntary stockbuilding in the second quarter of 1986 is expected to depress activity in the first part of this year, notwithstanding some strengthening of final demand. A modest pick-up is therefore not likely until the second quarter, led by investment and exports. Household consumption is likely to recover only moderately, given the weak growth of real incomes. The slowdown in the growth of world demand, projected for around the end of this year, will again limit growth in 1988. Overall, GNP seems likely to grow by 1.7 per cent in 1987 and 1.3 per cent in 1988. As a result only part of the considerable increase in profits in 1985-86 seems likely to be used for productive investment. The risk of an upturn in inflation in France in the coming quarters seems small. The policy of strict control of public sector salaries, combined with rising unemployment, seems likely to lead to moderation in the overall growth of incomes : hourly wage rates are likely to increase by a modest 2.8 per cent in 1987 and 2.4 per cent in 1988. Output prices seem likely to stop growing faster than unit costs, except in the tertiary sector, which has not yet restored its margins to the levels of the 1970s. On the assumption that the price of oil will stabilize around $ 16 per barrel at the end of the second quarter, the growth of the consumer price index will be around 2.7 per cent in 1987 and 2.4 per cent in 1988. Under the assumption of a progressive increase in the oil price to $20 by the end of 1988, inflation could be around 3 per cent both this year and next. In either case disinflation, as measured by the GNP deflator, will continue, with inflation falling from 5 per cent in 1986 to 3 per cent in 1987 and 2.5 per cent in 1988. Despite the modest growth of domestic demand and inflation, the external surplus of goods and services recorded in 1986 (around FF 21 billion) seems likely to be smaller this year because of a reduction in the manufactures balance of FF 15 billion. The decline in international competitiveness, due to the fall of the dollar since 1985, could be expected to result in some loss of market share. Nevertheless this is likely to be limited to 1.5 points in 1987 and 1 point in 1988, compared with 3 points over the course of the last two years. The slow growth of employment in the market sector seen in 1986 risks being interrupted because of modest growth of production and the perverse effect of the youth employment scheme "Emploi des Jeunes". It seems that a number of people were taken into employment in 1986 in anticipation of an exemption from social charges. Despite the recent new measures in respect of long-term unemployed, unemployment will continue to grow significantly. The number of unemployed could reach 2.8 million in the spring of 1988. The pick-up of investment in industry in 1984-1985 seems likely to continue in the next two years (6.5 per cent in 1987 and 5.4 per cent in 1988 in 1970 prices for the total of non-financial enterprises). Is this likely to be sufficient ? It would seem to be so if compared with the likely growth of internal and external demand, but not if considered in relation to the now considerable capacity to finance productive investment out of retained earnings. The study reported in the last part of this article suggests that the reduction of corporation tax would probably not be effective in sparking off a significant increase in investment. For given budgetary cost a direct subsidy to productive investment in the form of a tax credit would be ten times as effective. But the benefits would be realised only over the medium term.
The Respite Département des diagnostics de l'OFCE Following the upheavals of 1986, 1987 has so far been somewhat calmer. The depreciation of the dollar came to an end. The price of oil has come back to 18 $/bl and stabilised. Slow economic growth has continued in the major industrialised countries. World trade of manufactured goods continues to follow a slow upward trend, while the market shares of the main industrialised countries are slowly tending to display a more balanced pattern. Business conditions have therefore recently improved. But all this looks more like a respite than the first phase of stable world economic growth. The economic balances recently observed are indeed fragile. The major risk is of a rapid dollar fall that would trigger a restrictive monetary policy in the United States ; inflation is a major concern even if it does not yet show up. Even should this situation be avoided, the American economy is nervertheless likely to enter recession in 1988. Japan and Germany will lack dynamism. In the United Kingdom and Italy, where economic growth is currently fast, a slowdown will occur. A slight rise in the prices of oil and raw materials will enable LDC to increase their imports. But overall world trade will slacken. In France, economic growth will probably resume in the coming months but its magnitude will be small. GNP is projected to rise by 1,4 % in 1987 and 1,8 % in 1988. Household consumption is no longer sustained by real wages, which have stopped increasing, only by non- wage incomes and tax cuts. However social security deficits must be reduced, so that either benefits will have to be reduced or contributions increased. In any case, disposable personal income will slow down. Consumer borrowing will become more important so that consumption might rise by 2 %. Private productive investment has been able to grow, and will continue to do so, owing to an improvement in the financial situation of the firms that results from recent developments in the oil price and in wages. Restructuring continues, but that seems unlikely to lead to an acceleration in plant and equipment expenditures, given sluggish final demand. This appears clearly in the downward revision of planned expenditures recorded last spring in France as well as in other industrialised countries. Export performance will remain weak. Market shares will undoubtedly shrink despite the slight recovery of LDC imports and despite good performance in civil aeronautics and automobile vehicles. Production will not even keep pace with the small growth of final demand because imports will increase faster. Insufficient competitiveness accounts for the projected worsening of the trade deficit at a time when economic growth is slow. An increase of 3 % in productive investment in 1987 and 1988 will probably prove high enough to damage external trade but too low to restore competitiveness. The oil price fall will thus then have enabled France to record a current account surplus for only one year (i.e. 1986). An increased deficit will then be experienced, even though demand will lag behind that of France's economic partners.
The tightening of monetary policy in industrialised countries from 1980 onwards is one of the causes of the subsequent slowdown in economic growth along with inflation and the reduction of international liquidity. This trend will continue in the near future. Despite a smooth reduction in the growth rate, the needs of the american economy in foreign capital will remain substantial. This drain on foreign savings is likely to hamper recovery elsewhere and maintain the strong dollar. Since the second oil shock, the underlying trend of growth has been 1 % p. a. higher in the US than in Europe as a whole and France in particular. The French economy, which was in phase with the rest of the EEC in 1983, shows signs of lagging. This should be more evident in 1985 than 1984 but insufficient to close the trade gap. There will be a gradual easing of economic policy in 1985. Consumer expenditure, which has been maintained over recent months only by a fall in the saving ratio, should pick up with the reduction of tax levels. Investment should continue to recover thanks to public funding and an improvement in profits but will be restricted to the modernisation of industry. With fewer jobs on offer and an increasing labour force, the rise in unemployment is unlikely to be stemmed.
The collapse of oil prices together with the depreciation of the dollar fail to bring the world economy back to its pre-oil shock situation. At the beginning of spring, the real price of oil is still twice what it was at the end of 1973. Besides, many decisions in the field of investment and indebtedness cannot be reversed. Lastly, the relative weight of trading partners has considerably altered. In spite of these shifts, Japan, Europe and the USA will benefit from the ongoing counter shocks. Terms of trade will soar in the first two regions, enabling them to enjoy an accelerated rate of growth and, at least until the end of 1986, an improvment in their balance of current account. The third of these countries could more easily reduce its imbalances both budgetary and external. The results of all these movements are still uncertain where latin America and Asia are concerned ; much will depend on the attitude of developped countries as regards a decrease of interest rates and the spreading of protectionism. OPEC and Africa will be the main losers. This new international environment might boost France's economic growth by 1 %. Household consumption will be sustained by and increase in real disposable income following two years of decline, an by a decrease in the saving ratio as rebuilding financial assets calls for less savings in a time of low inflation. Investment will be somewhat pulled by the upsurge of demand and the growth of profits, but those are still small relatively to the capital stock, while reducing indebtedness remains a top priority for the firms. The trade balance will remain positive albeit the industrial balance will deteriorate further as imports will soar while exports lack competitiveness. The rate of inflation might fall under 2 %. Real interest rates will remain high despite the lowering of nominal interest rates.
Les effets bénéfiques de la baisse du prix du pétrole pour les pays de l'OCDE, accentués, hors les Etats-Unis, par la dépréciation du dollar, ont tardé à se manifester. Les ménages ont accru leur taux d'épargne avant de dépenser leur surcroît de revenu, tandis que les entreprises, dans l'attente de nouvelles baisses de prix, ont stocké aussi peu que possible. Cela a amplifié le marasme du commerce mondial de produits manufacturés. Un retournement de certaines de ces tendances, opéré durant l'été, laisse à présent attendre une accélération de la croissance. Elle ne sera sans doute qu'un sursaut aux Etats- Unis. Par contre en Europe une dynamique plus durable pourrait s'enclencher dans plusieurs pays, l'investissement des entreprises venant s'adjoindre à la consommation des ménages ; elle sera toutefois tempérée par la poursuite des politiques d'assainissement des finances publiques. En France la croissance du PIB atteindrait 2,8 % en 1987, grâce à la reprise de la demande extérieure et à la bonne tenue de la demande interne. L'investissement des entreprises s'accélérera et surtout se diffusera à l'ensemble des activités, gagnant les petites et moyennes entreprises. Des profits encore en hausse et une demande finale soutenue se combineront pour que les entreprises étendent leurs dépenses d'équipement, tout en se désendettant. Le revenu réel des ménages pourrait encore progresser au rythme de 3 % l'an, et permettre que la consommation s'élève en même temps que le taux d'épargne. L'Etat pourra comprimer son déficit tout en allégeant la fiscalité. Cependant l'excédent commercial dégagé en 1986 laisserait place à un quasi-équilibre l'an prochain, du fait d'une nouvelle contraction du solde industriel et, malgré une légère croissance des effectifs employés, la montée du chômage ne serait pas enrayée.
