Trade Deficits, Inflation Seen as Dangers : World Economy Survived Crash, Bankers Say

Central bankers said Monday that the world economy was in better health than expected after last year’s crash in the financial markets but it still faced major dangers.

The Bank for International Settlements drew attention in an annual report to renewed signs of higher inflation and rising interest rates and also to the Third World debt crisis, while noting that global trade imbalances still persisted.

And Wim Duisenberg, the president of the BIS, which acts as a central banker to national central banks, told the group’s annual meeting that governments had to do more to correct those imbalances.

The United States was cited as the one most responsible for the imbalances and blamed for a lack of fiscal action to cut its budget and balance-of-payments deficits.

Alexandre Lamfalussy, general manager of BIS, said the United States must act to brake the rise in domestic consumption and curb import demand.

Task Defined

The BIS said imbalances in the U.S., West German and Japanese current accounts, which measure trade and international payments for services, had passed their peak. But the imbalances were expected to remain high.

Last year, the U.S. trade deficit was $170 billion, measuring trade and services, while West Germany had a surplus of $45 billion and Japan a surplus of $87 billion.

Duisenberg said even if West Germany and Japan accelerated growth by 1%, this would probably cut the U.S. deficit by only $5 billion to $10 billion. “The main task is on the other side of the ocean,” he told journalists.

Duisenberg, governor of the Dutch central bank, also stressed the risk of inflation in his prepared remarks.

“After having been dampened by the stock market crash, they (inflationary expectations) have recently resurfaced, particularly in the United States in connection with the combined strength of domestic and export demand,” he said.

The BIS report praised monetary authorities for the way they dealt with the October crash, which sent shares down by between one-third and one-half from 1987 peaks.

Duisenberg said a feature of the crash was that it had been restricted to financial markets. “There appears to have been no significant impact on economic activity,” he said.

He noted that in the first three months of 1988, financial markets had been relatively calm, but recent rises in interest rates in the United States, West Germany and Japan showed signs of resurfacing unrest.

He also said that, barring a U.S. recession which would depress U.S. demand for imports, “the rest of the world will have to finance sizable U.S. current account deficits for some time to come.”

Commended Japan

In his speech, which largely summarized the BIS annual report, Duisenberg said future developments largely depended on the way markets believed that governments and central banks were handling the economic situation.

Central banks had intervened recently in foreign exchange markets but “nobody thinks that intervention alone can stabilize the dollar.”

Duisenberg commended Japan for stimulating demand for goods by its fiscal policies but he had less praise for West Germany, Western Europe’s most important economy.

“Germany’s fiscal policy, too, has moved in the same direction . . . Although not as far as some, both in Germany and elsewhere, would like,” he said.

The Bonn government has persistently rejected demands to stimulate sluggish growth by bringing forward to next year a round of tax cuts scheduled for 1990.

On the debt crisis, Duisenberg said major debtors were reducing their current account deficits and there had been initiatives to reduce their debts. But there was no sign they were regaining access to new money through the financial markets.

“All in all, and despite the progress that has been made . . . the debt situation remains a major problem,” Duisenberg said.

Echoing recent calls from the Paris-based Organization for Economic Cooperation and Development, Duisenberg called on newly industrialized countries in Asia to play a role in reducing international trade imbalances.

Nations like Taiwan and South Korea have increased their exports in recent years and built up large trade surpluses.

Duisenberg said: “This group of countries, and Taiwan in particular, can make a significant contribution to the reduction of the present global payments imbalances, mainly by the adoption of appropriate trade liberalization and exchange rate policies.”