World View : Is Global Recession Coming? Good Question : Many experts see signs of sluggish growth. But the U.S. is treated like Chicken Little.

Is the world heading into a serious global recession?

Seldom has it been more crucial for the world’s economic policy-makers to be able to answer that question, but at the end of their semiannual meetings last week, finance ministers and central bankers from the United States and its major economic allies were far from agreement. They left town having done little more than paper over their differences with diplomatically worded communiques--leaving the rest of the world, whose economic well-being is tied to the industrial economies, facing an uncertain future.

Although the official economic forecasts almost all call for generally sluggish growth in the United States, Japan and Europe (see chart on Page 5), most analysts say the situation is still precarious. The Bush Administration argues that the prognosticators are being dangerously optimistic. In its view, only a concerted effort to cut interest rates can keep the recession--thus far confined to the United States, Britain, Canada and Australia--from spreading worldwide.

But this country’s main industrial allies seem to be affording the Administration all the credibility of Chicken Little. Led by Germany and Japan, economic policy-makers from the powerful Group of Seven industrial countries insisted upon staying their divergent courses. The U.S. prescription is self-serving, they said, and a guarantee of inflation that would only cut short any real economic growth.

“U.S. arguments are not only unpersuasive,” sniffs London’s Financial Times, “they are cheeky.”

Who’s right?

Who knows? shrugs Jean-Claude Paye, secretary general of the Paris-based Organization for Economic Cooperation and Development. “This is the period (in the economic cycle) when the greatest uncertainty exists on the forecasts.”

Moreover, in the eyes of some critics, what policy-makers have been debating this past week does not even address the real issue: It is not just interest rates that will determine the fate of the world economy, but rather whether the industrial countries can repair their fragile financial systems.

Unless they do, the bitterly fought interest rate question is moot, because there will be no capital to finance a recovery.

The reason is that the recession in the United States--and to some extent, the slowdown elsewhere--is not the result of a slowdown in manufacturing, as traditionally has been the case, but stems mainly from a collapse in the value of real estate and other assets, dampening spending and investment.

A. Gary Shilling, who runs an economic forecasting firm in New Jersey, warns that the impact of any interest-rate reduction--including the U. S. Federal Reserve’s cuts last week--will have little effect if bankers saddled with portfolios of bad loans continue to be wary of lending.

“When bankers are so scared, it does not make much difference what the interest rate is,” Shilling argued. He and others contend that the danger of recession will not abate until the financial system is repaired and confidence is restored.

Steve Axilrod, a former Federal Reserve staffer who is now a vice president of Nikko Securities in New York, agrees. “The financial problems we’ve got are the end of a large-scale speculative bubble.”

What makes it all so scary is that the disagreement comes amid a bevy of new dangers that go well beyond the differences in forecasts:

* Negotiations aimed at lowering trade barriers worldwide are showing some progress after collapsing altogether last December. Bad economic times, however, often lead the other way--to protectionism--and the heavily indebted countries of Asia, Africa and Latin America will suffer worst if larger countries do not open their markets.

* Eastern Europe and many developing countries, having taken the capitalist leap of faith that markets can do a better job than government planners in running their economies, must now attract private investment to survive. An economic downturn could be the death blow to their already difficult efforts.

* The Gulf War has left the poorer countries of the Middle East devastated, and some of the richer ones too consumed by their own rebuilding to help out. With Western economies running out of steam, many wonder who will have the money to do the reconstruction.

* With a few notable exceptions such as Mexico, Latin America is limping along with little progress to show in boosting its economic prospects. Third World countries in Africa and elsewhere seem to be falling even further behind.

* Both Germany and Japan, the twin engines of world growth in previous years, are facing precarious financial situations. Japan is trying to cope with an inflated real-estate market that could collapse more violently than the U.S. market did; Germany’s booming economy could be dragged down by the costs of its reunification.

* The picture in the rest of Europe is spotty at best. Although France’s economy is chugging along, Britain and Italy are mired in high inflation and slower economic growth.

Is all this a formula for a recession? “The threat is quite real,” says Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis.

While none of these forces is apt to create a serious slump on its own, each could worsen the overall world picture if the U.S. recession spreads, as Treasury Secretary Nicholas F. Brady and his colleagues fear.

Once that begins, a recession could feed upon itself. A slump in Germany and Japan, for instance, would deprive the United States the booming export market that it hopes will lift it from its recession.

But not everyone agrees that the picture is so bleak. Lyle Gramley, a former Federal Reserve governor now with the Mortgage Bankers Assn., notes that economic growth in Germany and Japan, while somewhat slower, is still quite healthy.

“This is not 1982 by any stretch of the imagination,” he says. “I don’t think a global recession is very likely at all.”

Indeed, he and others contended that the Administration’s push for lower interest rates--which has been resisted even by this country’s own central bank--arises less out of concern for the global economy than a desire to assure that consumers in other countries have enough money to buy more American goods.

In essence, they say, the United States--constrained by its own inability to get rid of its huge budget deficit--is asking others to bail it out of its own recession. “If you don’t have any fiscal levers,” Gramley explains, “you have to resort to pounding on your neighbor countries.”

But those other countries are preoccupied with problems of their own.

Japan’s central bankers, having seen the collapse of the U.S. stock and real estate markets after the excesses of the 1980s, clearly fear that their nation might be forced to pay a similar price. They are determined to burst their “bubble economy.”

Central bank President Yasushi Mieno has gone so far as to announce publicly that land prices should fall 20%. He raised the discount rate three times last year, almost doubling it, to choke off the credit that feeds the speculators.

“The Bank of Japan has both feet on the brakes,” says Tony Riley, director of research at Shilling’s firm.

Meanwhile, Germany’s Bundesbank is holding interest rates high so that inflation will stay in check while the government borrows heavily to put Eastern Germany back on its feet. Adding to its inflation fears is the fact that its money supply ballooned after the government agreed to swap its currency for East German marks one-for-one.

Other European countries are also feeling the effects. They have tied their economic destinies to the powerful German engine through the European Community, but their economies do not have the German buoyancy.

Meanwhile, as the Administration continues to argue for a global interest rate cut, it is finding it difficult to persuade even its own central bank that this is the proper course to take. Although the Federal Reserve has cut interest rates over the past few months--most recently, last Tuesday, when it slashed two key rates that traditionally set the pattern for interest charged by banks--it generally has been following the financial markets, rather than leading them, as the Administration has urged.

So the major economic powers have placed their bets at a moment when it seems the stakes could not be higher in almost every part of the globe. And it seems the Bush Administration stands almost alone in its view that lower interest rates are the solution to the problem.

In the past, “usually it’s been everyone adapting to the United States,” Axilrod says. “In many ways, the shoe (now) is on the other foot.”

GLOBAL SCORE CARD: WHO’S MINDING THE ECONOMIC STORE

International alliances formed to set policies on trade, debt and aid to developing nations steer the course of the world’s economy. The leader of the pack is the Group of Seven, economic powerhouses that hold the greatest sway over global money matters. G-7 leaders met in Houston last July for their annual summit, right.

The Group of Seven (G-7). Finance ministers and central bankers of the United States and its six largest economic allies--Germany, Japan, Britain, France, Italy and Canada. Meets at least four time a year. Discusses and sets broad policies on interest rates, economic policy, exchange rates, trade, Third World debt, aid to developing countries and the international economic agencies.

The Economic Summit. Attended by heads of government of the G-7 countries--along with their foreign ministers and finance ministers as well--the annual summit provides the major political impetus for global economic initiatives ranging from trade talks to operations designed to combat drug-laundering.

The International Monetary Fund. In recent years, the the 155-country IMF has devoted most of its energy to lending money to financially troubled Third World countries that have been unable to keep up the payments on their foreign debt. The organization won’t lend to debtor countries unless they first pledge to adopt specific policies designed to bring spending into line with incomes and make their economies more efficient.

The World Bank. Sister organization to the IMF, the World Bank has become the major lender of new development capital to the Third World. Like the IMF, the 155-member World Bank insists that borrowing countries improve their economic policies to qualify for loans. But its demands for policy changes are aimed more at strengthening debtor countries’ economies over the medium-term rather than the short-run.

The General Agreement on Tariffs and Trade. This Geneva-based group was supposed to actas a stopgap measure until the postwar powers could agree on how to set up a new International Trade Organization, but the accord never materialized and the GATT, as it’s known, is now the principal body for administering the world trading system.

The Organization for Economic Cooperation and Development. This Paris-based group comprising the 24 largest industrialized nations is supposed to be a forum for discussing economic policy ideas, but it has acquired added status over the years as a policymaking body as well. Its annual spring meeting is widely viewed as a prelude to the Seven-Nation Economic Summit. The OECD also conducts research on important policy issues, ranging from agriculture to labor.

The Group of Ten. Despite its name, the Group of Ten has 11 members--those of the G-7 plus Belgium, Sweden and the Netherlands--and Switzerland, which was recently added. A holdover from the 1960s and 1970s, the G-10 essentially takes its cue from the G-7.

The Interim Committee. A 22-member group of finance ministers from industrialized and developing countries, the Interim Committee serves as the major policysetting body for the IMF. The session takes its cue from the G-7 and G-10.

The Development Committee. A 22-member panel--with proportionally more members from developing countries--that oversees the World Bank.

World Economy: Trying to Figure it out

Some observers are projecting a slight increase in the world’s economic growth late this year and in early 1992. Are they right? ECONOMIC GROWTH

In percent charge

1991 Germany 2.8% 1.9% Japan 3.6 3.9 United States 0.2 2.7 Africa 2.0 4.8 Asia 5.0 5.2 Eastern Europe -1.3 2.6 Europe -3.5 -1.7 Middle East -3.3 8.5 Western hemisphere 1.0 3.3 All industrial countries 1.3 2.8 All developing countries 0.8 3.4

INFLATION

In percent change

1991 1992 All industrial countries 4.8% 3.90% All developing countries 40.9 18.0

SOURCE: International Monetary Fund