U.S. Slowdown Seen as Good Sign Overseas

Recent signs of gradual slowing in the U.S. economy have set some Americans to worrying about a possible recession, but the rest of the world views the somber news with distinct relief.

Back home, the talk about a possible economic downturn has been seeping into forecasters’ pronouncements. One of the most bearish, Wall Street economist A. Gary Shilling, believes that the U.S. economy “may well be already in a recession” and warns: “It could be long and deep.”

But overseas, forecasters are a lot less nervous. Rather than predicting a recession, they are confident that America is headed for a gradual slowdown that eventually will result in a long-hoped-for “soft landing” for the economy.

If that happens, they say, the world may avert some of the dangers that economists have been predicting for the past several months--that a continually overheating U.S. economy might strain America’s production capacity, spur more import buying and exacerbate inflation.

Instead, Ulrich Ramm, chief economist for the Frankfurt-based Commerzbank, says the slowdown in sight seems likely to do the opposite--trim the U.S. trade deficit, ease global inflation pressures and lower interest rates, thus helping Third World debtors.

“It’s just the prescription that the world economy needs,” Ramm asserts.

The easing of pressures around the globe was one of the major reasons that leaders of the world’s seven largest industrial democracies steered clear of any major action at their annual economic summit meeting here last weekend.

“The truth of the matter is that economic conditions around the world are very, very good, taking the broad view over time,” U.S. Treasury Secretary Nicholas F. Brady asserted. “You don’t want to change the throttle settings right now.”

Sharp Contrast

Gabriel Francois, economist for Banque National de Paris, agrees. After eight years of steady expansion, he said, a slowdown “is necessary for restoring the equilibrium of the American economy.” He called the soft landing “an excellent thing.”

The situation is in marked contrast with that of only a few months ago: Interest rates were rising; the dollar was on the upswing, piercing the upper limits of the ranges that finance ministers of the industrial countries had set for it, and inflation was speeding up.

Partly as a result, forecasts by the major international economic organizations were gloomy. Last autumn, for example, the Washington-based International Monetary Fund updated its annual outlook to predict increased inflation and the start of a recession.

But now, with overheating no longer a danger in the United States and most analysts rejecting fears of recession as well, foreigners are becoming increasingly confident that the clouds of last March and April will yield a silver lining by late fall.

A recent report by the 22-country Organization for Economic Cooperation and Development, a Paris-based forum for industrial countries, predicted that the long-sought soft landing is likely. It forecasts just enough growth to avoid a recession.

Global Improvements

That, in turn, would help improve global economic conditions on several fronts:

With the U.S. economy slowing, American consumers will temper their previous spending spree, cutting back on import buying and freeing up U.S. manufacturing plants to produce more for export. Lack of adequate production capacity has been limiting export sales.

The result could be a far larger improvement in the U.S. trade deficit than had been expected. Tadashi Nakamae, a prominent Japanese economist, predicts that the U.S. trade deficit, forecast to be about $101 billion this year, could plunge another $30 billion in 1990.

To Commerzbank’s Ramm, the continuation of the huge U.S. trade deficit--and the corresponding oversized surpluses in West Germany and Japan--represent “the No. 1 economic problem facing the world economy today. They are a sword hanging over us,” he said.

Ramm also points out that less buoyant economic activity in the United States will help dampen demand for commodities and oil, stemming the recent rise in petroleum prices, which had been adding to existing price problems.

A less frenetic U.S. economy could also ease broader inflation pressures in the United States, paving the way for further declines in American interest rates, which most likely would have an impact on global interest rates as well.

That would help on two counts: It would ease inflation pressures globally--important to countries such as Britain and Japan, where inflation seems to be back on the rise--and it would help Third World debtors, whose debt burdens vary widely with interest-rate changes.

J. Paul Horne, Paris-based managing director of Smith Barney, Harris Upham, the U.S. securities firm, notes that the rate to which interest charges on Third World loans are pegged--the London Inter-Bank Offer Rate, known as LIBOR--has fallen to 8.81% from a peak of 10.6% in March.

With each percentage-point drop in the LIBOR rate worth about $1.5 billion in lower debt payments for the developing world, the 1.79-percentage-point drop recorded since March already has brought almost $3 billion in relief to Third World debtors and more seems on the way.

“My guess will be that the LIBOR rate will be about 8% by year-end,” Horne says.

A continued decline in U.S. interest rates could also help stabilize exchange rates around the world--which have been gyrating in recent months as interest rate differentials narrowed between the United States, West Germany and Japan--and nudge the dollar down further.

A rising dollar, such as seen in early May, forces America’s trading partners to raise their own interest rates and sparks fears that U.S. exports will become less competitive, blunting further improvement in the U.S. trade deficit.

Although some analysts have been urging U.S. officials to push the dollar even lower to help bring down the trade deficit, now at least, Horne asserts, the exchange markets will not have any artificial pressures. “The dollar is looking the way it should now,” he says.

Want to Prevent Speedup

To be sure, not everyone abroad believes that the benefits from the predicted soft landing necessarily will be all that dramatic--unless the economists are proved wrong and America ultimately falls into a full-fledged recession.

Economist Nakamae, for example, states that with inflation having been accelerating for so long, the underlying inflation rate is so high that a sharp drop is virtually out of the question. “The most we can hope for is to prevent a further speedup,” Nakamae said.

And analysts are divided over just how much further interest rates will decline. Nakamae, again, is wary of rash predictions. “I don’t think global interest rates will decline as much as expected,” he says.

Still, the slowdown is welcome by any standard. Even countries such as Taiwan and South Korea that are heavily dependent on the sale of exports to the United States stand to gain more in broad economic terms than they will lose from the small falloff in sales.

And with the West German and Japanese economies likely to continue in robust form this year and next, the global economy is not expected to suffer from the U.S. slackening. Europe, moving toward an integrated economy by 1992, “has a special dynamism,” Ramm points out.

Even so, the prospect that the U.S. economy is finally beginning to slacken may be the best economic news that the rest of the world has had in months. “I’m very optimistic,” says BNP’s Gabriel Francois, who last year was predicting a U.S. recession.