Section 15. Trends of the World Economy
Looking at the trends of the world economy, most advanced countries entered the stage of business recovery from the economic stagnation of the preceding year and generally registered smooth economic growth in 1972. The problem of price increases, however, became more serious in 1972, especially in the European countries.
It can be said that the economies of the developing countries were generally in a favorable climate as a whole because of the effects of the economic recovery in the advanced countries and also because of the improved market conditions for primary commodities.
In the Communist bloc, however, the economies could not develop smoothly as planned partly because of the poor performance of agriculture in the Soviet Union and in China.
1. Business trends
(1) Developments in the advanced countries
(A) Business recovery
The economies of the advanced countries in 1972 moved steadily forward toward recovery throughout the year despite some unstable factors in the international monetary situation. Although Britain and Italy lagged behind other advanced countries, it can be said that the advanced countries as a whole enjoyed a business recovery. The OECD estimated that the real economic growth rate of seven major OECD members (United States, Britain, France, Germany, Italy, Canada and Japan) in 1972 was 5.75 per cent, which was much higher than the 3.3 per cent in 1971.
In the United States, the economy showed signs of recovery in 1971, and the business recovery gathered momentum in 1972, with the economy registering a real growth rate of 6.5 per cent in 1972. The growth rate was the second highest among the advanced countries after Japan. Major factors contributing to this powerful growth were steady plant and equipment investment, personal consumption expenditure and private housing construction. As a result of this economic recovery, the rate of unemployment dropped from 6 per cent at the end of 1971 to 5 per cent in January 1973, showing considerable improvement.
The Canadian economy continued to move steadily upward, registering a real growth rate of 5.5 per cent, the same as in 1971.
Among the major Western European countries, the French economy continued its favorable growth since 1971, and the Federal Republic of Germany also entered the stage of recovery. But the British and Italian economies lagged behind. Although the British economy began to recover in the second quarter of 1972, in Italy there was no clear business recovery in 1972 partly because of the recurrence of labor unrest in the autumn when labor contracts were renewed.
France maintained a growth rate of more than 5 per cent following a similar performance in 1971 owing mainly to increased personal consumption expenditure. France began to tighten the monetary policy in the autumn to combat inflation. French fiscal policy maintained the balanced budget principle and refrained from either stimulating or curbing business actively.
The economy of the German Federal Republic recovered to record a growth rate of more than 3 per cent in 1972, compared with 2.8 per cent in 1971. But investments in plants and equipment in the private sector did not increase much and consequently business as a whole did not undergo any significant recovery. In the spring, the government adopted a monetary policy aimed at lowering interest rates and absorbing excess liquidity in order to stimulate business and check the inflow of short-term capital. Following the increased money supply incurred by the pound-sterling crisis in June, it stepped up measures to absorb excess liquidity to curb inflation. On the monetary side, countermeasures, including a raise in the official discount rate, were taken in the autumn.
In Britain, the number of unemployed workers dropped from about 880,000 in March to about 730,000 at the end of 1972 with the business recovery.
In January 1973, the enlarged European Communities was established with the formal participation of Britain, Ireland and Denmark. The EC is thus expected to increase its weight further in the future world economy.
Although Japan's real economic growth rate in 1971 was 6.7 per cent, a low growth rate for Japan, its business showed remarkable improvement in 1972, especially in the latter half of the year. The real growth rate was more than 9 per cent.
(B) Price trends
In 1972, price increases slowed down in the United States after it had achieved a high rate of economic growth, with the increase rate of consumer prices staying at 3.4 per cent per annum, the lowest figure among the advanced countries. It seems that the wage and price control measures since the summer 1971 proved to be quite effective. On the other hand, the so-called state of stagflation in various Western European countries was aggravated when business began to recover. These countries concurrently took measures, including the raising of the official discount rate, to absorb excess liquidity and tighten the money supply since the autumn of 1972. In addition, Britain took measures to freeze wages and prices temporarily. Inflation control became the most important policy aim in the European countries.
In Japan, the increase rate of consumer prices was less than 6 per cent. This rate was lower than the rates in the Western European countries because business still had not entered a stage of full-scale recovery in early 1972 partly due to the effects of the yen revaluation. Wholesale prices, however, jumped in both the United States and Japan from the autumn, giving rise to concern over the price trend in 1973.
(2) Poor agricultural production in Communist countries
In the Soviet Union, severe cold and a drought caused the production of grains to drop by 4.6 per cent from the 1971 level. As the result, it was compelled to import grains in large quantities. The production of most other agricultural commodities also dropped from 1971 levels. In the industrial field, the Soviet Union's plan to increase production by 6.9 per cent was not met and the real growth rate remained at 6.5 per cent. Its nominal national income in 1972 was about 310,000 million roubles, an increase of 4 per cent over 1971, while the planned real growth rate was 6 per cent.
In China, agricultural production decreased compared with 1971 because of a drought. On the other hand, it is estimated that industrial production increased in absolute terms compared with 1971, although the rate of growth declined.
(3) The economies of the developing countries
The economies of the developing countries remained favorable throughout 1972 thanks to increased demand for primary goods resulting from the recovery of business in the advanced countries. It seems that the conclusion of international agreements on such commodities as tin, wheat and coffee, and a shortage of agricultural products caused by poor crops in some countries pushed up prices and served as a plus factor for the developing countries as a whole.
Although there were unfavorable factors, such as the stagnant flow of aid, the sluggish agricultural production due to the bad weather and increased " of industrial products supplied by the advanced countries, it is considered that the business recovery in the advanced countries and the increased prices of primary goods eliminated the major causes of the business slowdown in the developing countries since 1970.
In 1971, the developing countries as a whole achieved the planned real growth rate of 6 per cent under the Second United Nations Development Decade. In 1972, the developing countries as a whole seem to have achieved a growth rate higher than the target, although rates of growth differed from country to country.
The oil-producing countries registered a particularly high growth rate owing to favorable petroleum exports.
2. International monetary situation
(1) The year 1972 under the Smithsonian system
The system created by the Smithsonian agreement managed to survive in 1972. The Smithsonian system suffered a partial blow by the floating of the pound sterling at the end of June. The precarious monetary situation caused by the speculative capital flow, however, did not lead to catastrophic results owing to the strong determination of the major countries to protect the Smithsonian system.
Behind the strong determination of the countries were domestic considerations, such as the presidential election in the United States, the protection of the EC monetary integration scheme, the EC's reluctance to revalue national currencies and the desire of Japan to avoid another yen revaluation. It can safely be said that, above all, it was the determination of the United States that was instrumental in keeping the arrangement from collapse.
(2) Prolongation of the floating rate system
Soon after the beginning of 1973, Italy adopted a two-tier exchange system. This compelled the Swiss franc to be floated and caused heavy speculation on the mark, exposing the fragility of the Smithsonian system. The monetary crisis did not calm down despite the 10 per cent devaluation of the dollar on February 12 and the subsequent parity change by the flotation of the yen and the Italian lira. These measures notwithstanding, the major countries were compelled to close down their exchange markets in mid-March again as the result of a series of speculative attacks on the Swiss franc, the German mark and gold.
After several international consultations, the situation settled down by the joint flotation by the six EC members other than Britain, Italy and Ireland, and intervention in the exchange market by the major countries including the United States. But in view of the existence of Eurodollars totaling 80,000 million dollars and the same amount of cumulative U.S. official external deficits, it seems that the international monetary crisis will not be fundamentally solved until a stable monetary system is established through a long-term monetary reform.
It is considered difficult to restore confidence in the dollar easily and therefore, the floating rate system is expected to continue for a considerably long time.