COLUMN ONE : Will the Recession Be Global? : There are some dire warnings that the world’s economies could fall like dominoes. But industrial nations may prove surprisingly resilient.
When Iraqi troops marched into Kuwait on Aug. 2 and threw the world’s oil markets into disarray, Philipp Holzmann AG, Germany’s largest construction company, did not bat an eye.
In the next month, Holzmann won contracts for a $57-million office building in Munich, a $40-million housing complex elsewhere in Bavaria and a $30-million apartment building in Dusseldorf. Marching into the new market in what was then East Germany, it also signed up for a $48-million hotel in Weimar.
“Nothing has stopped,” said Claus Pfeiffer, a spokesman for the company. “Our clients haven’t cut back, and neither have we.”
Holzmann’s go-for-it posture belies mounting fears among economists and business executives that the world is on the edge of a deep recession, one that could savage the economies of the biggest industrial nations and their smaller trading partners.
So far, the latest oil crisis has taken nothing like the economic toll of its two predecessors in the early and late 1970s. The risks to the world economy have increased, but the betting now is that tomorrow won’t bring global economic decline.
Worldwide growth is certain to weaken. There will be mass layoffs. Some nations may suffer greatly. But the most common assessment is that a substantial segment of the industrial world will remain remarkably buoyant and reasonably healthy.
Good luck is not the only reason. In the last decade, the industrial countries have insulated themselves from oil shocks by curbing their appetite for oil. And their policy-makers have learned how better to cope with outside shocks to their economies.
For all that, the world is paying an economic toll for the latest oil crisis. The United Nations has imposed a worldwide boycott of Iraqi and Kuwaiti oil, and oil prices have shot up.
Some nations, notably the English-speaking ones, seem to be on the slippery slope to recession. Canada and Australia, whose economies shrank in the three months from April to June, seem almost sure to meet the traditional definition of recession--two consecutive quarters of declining economic production.
The United States and Britain, whose economies were also foundering even before Aug. 2, are probably not far behind.
The investment banking firm of Salomon Brothers projects that the U.S. economy will produce less next year than this year. The Confederation of British Industry finds business pessimism at a 10-year high.
But many economists believe that Japan, Germany and much of the rest of industrial Europe will take little more than a glancing blow from the current crisis--unless, that is, the crisis grows much worse.
“The key to whether there will be a worldwide recession is how high oil prices go and how long they stay there,” said Ron Napier, a London-based economist with Salomon Brothers.
However, a substantial school of economic thought holds that the seeds of a worldwide recession had already been sown well before Aug. 2.
According to this camp, the all-but-inevitable U.S. recession will reverberate around the world by cutting into export sales in countries from Brazil to Japan. And the crash in Tokyo’s stock market, which lost nearly half its value this year before turning back up last month, will deplete Japan’s ability to finance investment in other countries around the globe.
Robert Z. Lawrence, an economist with Washington’s Brookings Institution, said the world’s economies have become far more dependent on each other in the last decade. Viruses in the United States and Japan, he said, can quickly spread to all corners of the globe.
A. Gary Shilling, head of his own economic-consulting firm in New York, predicts nothing less than a full-scale depression. “Our view,” he said, “is that it’s going to be global and deep.”
Already, business activity is noticeably slowing in industries that depend heavily on oil. Air Canada recently announced that it was laying off 2,900 employees, or 12.5% of its work force. Five American airlines--Pan Am, Midway, USAir, TWA and American--have announced layoffs, and others are likely to follow.
In the transportation sector, the wreckage is not confined to economies that appear headed for recession. Despite the generally prosperous Dutch economy, KLM Royal Dutch Airlines has announced a 15% reduction in staff and overhead costs over the next three years and the loss of 500 support-staff jobs.
Car companies are also feeling the heat. In a generally bullish Germany, most car makers are trimming their sails, according to Ernst Moritz Lipp, chief economist for Dresdner Bank in Frankfurt. And in France, Renault is planning for a 3% decline in sales next year--not as bad as the 15% after the first oil shock or the 5% after the second, but bad news nonetheless.
Japan, at least at present, is a relative island of tranquility. Toyota, for example, is sticking with plans to invest a whopping $4.5 billion during the 12 months that began July 1 and to open one new auto assembly plant and two new parts plants in 1992.
Economic growth generally continues strong in Japan, which owes its boom of the last five years not to increased sales to the United States but to a surge in demand by Japanese consumers. The Japan Department Stores Assn. reports that sales growth over the same month the previous year dipped in August to 8.8%--still vigorous, but down from the 14.2% registered in June.
“We haven’t seen any decline of people’s personal consumption since the gulf crisis,” said Kazuo Iwai, a spokesman for Takashimaya Department Stores. Not only have purchases of daily necessities held up, he said, but “sales of paintings and precious metals have been very good for the last several months.”
And outside such oil-dependent sectors as transportation and petrochemicals, the outlook remains generally bright in continental Western Europe.
Germany, which enjoys a happy combination of robust growth and inflation of less than 3%, is at the head of the class. Deutsche Bank, Germany’s biggest, said consumer demand, up nearly 5% in the last year, is fueling economic growth there just as it is in Japan.
The investment firm of Goldman Sachs expects moderate to healthy growth next year in all the major Western European economies: 2.8% in Germany, 2.5% in Italy and 1.8% in France.
For the world as a whole, Morgan Stanley, another investment firm, foresees economic growth of 2% next year, down a full percentage point from this year but far short of a global recession.
But whether the world can keep its head above water will depend on a host of unknowns.
Paramount is the depth and duration of the current oil shock, which is now in only its fourth month and has so far led to only about a doubling in oil prices. The two earlier shocks lasted far longer, with the first ending in a fourfold increase in oil prices and the second in nearly a tripling.
That is far from the only imponderable. What effect will the decimated Soviet economy have on the rest of the world? Will the former West Germany prove rich enough to solve the economic problems of the East now that they are unified? What about the recession in Eastern Europe as the formerly Communist economies test the waters of the free market? Closer to home, will continuing problems with the U.S. budget deficit finally come home to roost?
In that environment of uncertainty, analysts divide generally into two camps: the cautious optimists and the irrepressible doom-sayers.
The optimists expect the Persian Gulf crisis to end before Jan. 1, whether through diplomacy or violence. They expect the massive Saudi Arabian oil fields, so vital to the industrial economies, to escape unscathed.
The average price of foreign crude oil to U.S. refiners, which has more than doubled from less than $15 a barrel to about $34 since the crisis began, will gradually retreat, according to this scenario. Prices in 1991 will average somewhere in the $25 to $30 range.
Dresdner Bank’s Lipp, among many others, finds this scenario compelling. Unlike the first two oil shocks, he said, the world is not facing a major crude oil shortage because Saudi Arabia and other major producers are nearly making up for the 4.3 million barrels a day that have been lost from Iraq and Kuwait.
Prices have soared, he said, largely because consumers are stocking up. In Germany, for example, homeowners began laying in their heating oil in September instead of waiting as usual until November.
And even if oil prices head up to $40 a barrel and remain there through 1991, the global economy might well escape disaster. Brian V. Mullaney, a London-based economist for Morgan Stanley, said he expects the vigorous economies of continental Western Europe to grow by an average of 2.5% next year if oil prices fall back and to still manage growth of about 1.5% even if oil sells for $40.
“The oil price shock of 1990, unlike its predecessors of the 1970s, is not likely to be the straw that broke the back of global expansion,” Mullaney and New York colleague Robert S. Gay recently wrote.
Since the last oil shock in 1979-1981, the world’s major economic powers have insulated themselves to a considerable degree from the effects of rising oil prices.
Altogether, the 24 leading industrial nations consumed slightly less oil last year than in 1973, even though the sum of their economies had grown by about 75%.
Savings seem even more impressive when measured in dollars rather than barrels of oil. As a percentage of national economic output, oil consumption in each of the seven biggest industrial nations plunged by an astonishing two-thirds to three-quarters, according to Morgan Stanley.
Even the United States, the biggest oil consumer of the group, spent only 2.3% of its gross national product on oil last year, down from 8.1% in 1980.
The declining price of oil--it fell by about 50% during the 1980s--accounts for about half of the improvement. The other half results from more lasting factors, including energy conservation, a deliberate switch from oil to other fuels and a trend away from energy-intensive manufacturing industries to service industries.
“Structural adjustment over the last 10 years has given us earthquake protection that will more easily absorb the impact of a doubling of oil prices,” said Jean-Claude Paye, secretary general of the Paris-based Organization for Economic Development and Cooperation,
Compared to the two oil shocks in the 1970s, the latest crisis has hit at a less vulnerable part of the industrial world’s economic cycle.
Before the oil shocks of the 1970s, Dresdner Bank economist Lipp said, inflation was already rampant in many of the industrial countries. The soaring price of oil made inflation intolerable. Central banks responded by clamping down hard on national money supplies, and recession inevitably followed.
This time, by contrast, economic growth was solid in most industrial countries immediately before the Iraqi invasion of Kuwait, but prices were not getting out of hand. So the risk of exaggerated inflation is much less, and so is the likelihood of a downturn that generally accompanies the battle against runaway inflation.
Economic policy-makers have learned how to cope with outside shocks such as suddenly soaring oil prices.
During the first oil shock, in 1973-1974, some countries, notably Japan and Britain, tried to keep interest rates low to prevent recessions, Morgan Stanley’s Mullaney said. Instead, prices soared, and subsequent efforts to retaliate by raising interest rates merely deepened the inevitable recession that followed.
During the second oil shock, which began in 1979 during a period of particularly high inflation in the United States, the U.S. Federal Reserve and other central banks raised interest rates promptly. Once again, global recession resulted.
“Central banks are not inclined to repeat the mistake of the 1970s,” Mullaney said.
Lipp pointed to the worldwide stock market crash of October, 1987, as evidence that policy-makers have learned that a steady-as-she-goes approach to external shocks works best. After the crash, central banks initially poured money into their national economies to ensure against an abrupt slowing of economic activity. But they tightened up again quickly enough to prevent runaway inflation.
The International Monetary Fund, in its recent report on the world economy, suggested that policy-makers have also learned not to try to shelter consumers from huge oil price hikes. With the example of the United States in mind, the IMF said direct government subsidies for oil consumers result in little more than bigger budget deficits. And oil price controls merely distort markets and dampen incentives for oil companies to produce and for consumers to conserve.
But some analysts find the grounds for optimism less than compelling.
For one thing, they are not prepared to assume that the Persian Gulf crisis will end quickly and without major damage to Middle East oil fields. But even if it does, the doom-sayers find plenty of reasons for alarm.
Lawrence, of the Brookings Institution, said that the optimists have underestimated the domino effect of such ominous events as the likely U.S. recession and the recent plunge in the Tokyo stock market.
The U.S. recession, he said, will wreak havoc in the heavily indebted Latin American countries that rely heavily on the United States as an export market. Jeffrey Schott, a research fellow at Washington’s Institute for International Economics, said Brazil will take the hardest hit.
“And Brazil’s economy was already at the precipice,” Schott said. The government managed to rein in inflation from 80% a month to about 10%. But the cost was brutal--the economy has contracted by about 10% in the last year.
Even Mexico, a major oil producer, will not benefit as much as it might from rising oil prices because it has done little in the last decade to develop new oil fields. Production is up less than 10% since Aug. 2, and government officials concede privately that even that rate cannot be sustained.
Moreover, Mexico will be hit particularly hard by a recession in the United States because two-thirds of its exports go to its neighbor to the north.
There are danger signals from the other side of the globe as well. Tokyo’s stock market plunge, which at its worst slashed asset holdings by a staggering $2 trillion, has already cut into Japan’s ability to continue financing economic expansion around the world and the budget deficit in the United States.
The newspaper Nihon Keizai Shimbun reported that overseas purchases of stocks and bonds by institutional Japanese investors plummeted to $20 billion during the April-to-September period this year, contrasted with $51 billion during the same six months a year ago. If sustained, that trend could seriously impede world economic growth.
Shilling points to a host of additional perils--the persistent U.S. trade and budget deficits, the savings and loan disaster in the United States, the staggering debt burdens of many Third World countries and what he regards as massively overvalued real estate and other assets in Japan. All of these, he said, leave the world economy off balance and vulnerable to outside shocks.
Moreover, Shilling finds one peculiar feature of the latest oil crisis that bodes ill for the world economy. In the two earlier shocks, he said, the oil-producing nations invested their “petrodollars” in oil-consuming countries, whose own investment dollars had been siphoned off by soaring oil prices.
This time, by contrast, Saudi Arabia, which is reaping the lion’s share of the windfall from rising oil prices, is using much of it to defray the cost of the U.S. military presence in the Persian Gulf. However noble that effort may be in geopolitical terms, Shilling said, it is not as economically useful as financing industrial expansion in the oil-consuming countries.
Paye, the head of OECD, told the European Parliament recently that the economic outlook for the 24 industrial countries in his organization had turned from satisfactory to uncertain.
“The world,” he said, “appears to be poised on the brink of the unknown.”
Times staff writers Sam Jameson in Tokyo and Juanita Darling in Mexico City contributed to this article.
IS GLOBAL RECESSION LOOMING?
In 1973-74 and again in 1979-81, a sharp rise in world oil prices was followed by a global recession.
1990 oil prices
June: $14.89
Sept.: $29.74
But this time, the industrial countries depend far less on oil. (Oil consumption as a percentage of national economic production).
Japan
1980: 6.3
1989: 1.3
Germany
1980: 4.5
1989: 1.4
France
1980: 4.6
1989: 1.4
Britain
1980: 4.2
1989: 1.5
Italy
1980: 7.3
1989: 1.5
Canada
1980: 9.7
1989: 2.2
United States
1980: 8.1
1989: 2.3
Source: Morgan Stanley
ECONOMIC GROWTH: A MIXED BAG
One firm’s view of future economic growth in the seven largest industrial countries.
Japan
1990: 5.0%
1991: 4.1
Germany
1990: 4.1%
1991: 2.8
France
1990: 2.2%
1991: 1.8
Britain
1990: 1.6%
1991: 0.9
Italy
1990: 2.9%
1991: 2.5
Canada
1990: 1.2%
1991: 1.6
United States
1990: 1.0%
1991: 1.0
Source: Goldman Sachs
