High interest rates and uncertainty over the future of economic unity have all of Europe in a recession Japan, after a decade in which there were more jobs than workers, suddenly finds itself with unemployment. Canada, the single largest U.S. trading partner, can’t escape the morass in which it has been mired since 1990. The much-maligned U.S. economy has become the industrial world’s bright spot, but it cannot prosper on its own. U.S. exports are still rising, but the gains are far slower than in 1991. Meanwhile, imports are soaring as hard-pressed foreign companies seek to sell in the healthiest market around. The result: the U.S. trade deficit jumped to $26.5 billion in the three months ended Sept. 30, the highest level since 1990. After being the major source of growth for two years, trade threatens to become an economic drag in 1993. Says economist Gerald Holtham of Lehman Brothers International in London, “If the U.S. grows by 3 percent and the rest of the world does nothing, that’s going to hurt the U.S.”
The causes of the global gloom are more political than economic. Every major industrial country, save Japan, needs large tax increases or budget cuts to get its economic affairs in order, but leaders willing to take those painful steps are few and far between. In that vacuum, consumers and investors are putting plans on hold. “You have a crisis of confidence in almost every country, and I don’t see it getting better,” says a leading German politician.
The prognosis is gloomiest in continental Europe, where dreams of complete economic unification have given way to chaos and confusion. “Business in Europe is falling off a cliff,” says a U.S. money manager. Germany’s central bank, the Bundesbank, is keeping interest rates sky-high to achieve two separate but complementary goals. It wants to dampen inflation caused by Chancellor Helmut Kohl’s refusal to raise taxes to finance Germany’s reunification. At the same time, its policy has driven up interest rates across Europe, and the resulting downturn undermined support for plans to put one currency, managed by a European central bank, in place of today’s system, in which Germany calls the monetary tune for all. While the German public overwhelmingly endorses the Bundesbank’s policies, outside Germany many accuse the institution of fomenting a crisis in order to preserve its own influence. If that’s the plan, it has succeeded impressively: after a series of exchange-rate crises that have forced Britain, Italy, Spain and half a dozen other countries to cut their currencies loose from the mark since mid-September, plans to create a larger and more cohesive European Community are a shambles. But the turmoil has sent confidence plunging and layoffs soaring. “You have this pessimism in Europe because of the failure of the system to work,” says an executive of a big U.S. manufacturer.
Without big cuts in interest rates, the continental downturn will deepen. One influential economic institute predicts a 3 percent drop in Germany’s industrial output next year, and the picture in France, Italy, Spain and Sweden isn’t much prettier. Many American companies are feeling the impact. Caterpillar, one of the largest U.S. exporters, last week projected a significant loss in the fourth quarter, due in good part to lower sales in Europe. Illinois-based Outboard Marine has scaled back production of boat engines in Brugge, Belgium; recession has sunk the pleasure-boat business in Europe just as it did in the United States. With its auto sales in Britain down 30 percent from 1991, Ford has canceled night shifts at three assembly plants, and union leaders expect the company to announce the elimination of 5,000 European jobs this week.
Japan looks only slightly better. The government is so preoccupied with political scandals that matters like the precarious state of the banking system have gotten short shrift. A heavy debt burden and sharp drops in real-estate prices may take several years to work through. The brightest prospects are in the English-speaking countries. The Bank of Canada reduced its key lending rate by more than half a percentage point last week. Some economists foresee a strong rebound by early next year, but a huge budget deficit stands in the way. Britain, after a two-year slump so deep that many Britons label it a depression, is on the verge of recovery, with most economists predicting growth of 1 to 2 percent next year.
Despite the global gloom, the U.S. export boom is not entirely over. Marsh Co. of Belleville, Ill., expects overseas sales of its inkjet printers to rise by more than 7 percent next year. Valor Enterprises in West Milton, Ohio, says its cellular-phone antennas are hot in Europe. Even houses are selling, high interest rates notwithstanding: Timber Truss Housing Systems of Salem, Va., has shipped wall panels and roof trusses for 50 houses to Germany since June, and more are on the way.
But if Europe’s slump gets worse, such success stories may be harder to come by. “We’re going to see it getting much harder for the U.S. to make inroads into European markets, not so much because of European protectionism but because of declining demand,” says Michael Hodges of the London School of Economics. What can turn things around? Last week Germany’s powerful metalworkers union accepted an 18-month pay package well below the rate of inflation; if the Bundesbank responds by lowering interest rates, Europe’s economies might get moving by late next year. For faster action, however, “Europe needs external locomotives,” pleaded a recent Deutsche Bank study. But Europeans who think America will pull them out of recession in 1993 as it did in 1984 will be disappointed. The United States just isn’t growing rapidly enough to give other countries much of a ride. “Not a locomotive,” says a key government economist in Washington. “Maybe a tugboat.”
