Stagflation or Recession?

(2 of 2)

WEST GERMANY. Before the oil cutbacks and price rises, the Institute for Economic Research forecast growth of only 3% in 1974, or half the rate achieved this year. A study completed this month and assuming that energy supplies fall 10% to 11% short of meeting demand suggests that growth may be virtually zero. If that happens, unemployment will more than double, to about 2.7% of the labor force; the hardest blow, however, will fall not on Germans but on the many foreign workers in German factories. Real personal income will fall. Output of the auto, construction and household-appliance industries could well go down.

FRANCE. Still believing themselves to be virtually immune from oil shortages, thanks to their government's Middle East policy, the French appear to be less apprehensive about their future than many other Europeans. Their confidence is not entirely justified though.

Without the oil shortage, French economic growth would have been 4.5% to 5%. Professor Pascal Salin of the University of Paris thinks that there will still be some real growth, but forecasts rises in unemployment and the cost of living.

BRITAIN. Growth was already slowing when the oil emergency and a coal miners' ban on overtime work caused the government to order drastic austerity. Now, says W.A.P. Manser, adviser to a London merchant bank, the political situation makes economic forecasting virtually impossible for the short term. The outcome for the year will depend not only on the Arabs but also on how long the government holds to a mandatory three-day week for industry —which in turn depends on its negotiations with the Mineworkers Union.

Manser does opine that if the three-day week lasts only a month or six weeks into 1974, industry can probably recover the lost output in the remainder of the year—provided that the Arabs decide to make enough oil available.

A combination of energy-saving measures and stagnation or even recession could reduce European demand for oil. But that is not likely to reduce its price, warns Professor Jean-Marie Chevalier, an energy expert from France's University of Grenoble: "We have seen already that the producers can increase then" revenues by selling fewer barrels at higher prices. I see no reason why they should not continue that policy."

By 1980 Europe may well have developed alternatives to imported oil—coal, nuclear power, and North Sea oil—that will loosen the grip of Middle East politics on its economy. Chevalier cautions, however, that the alternatives will not be cheap: "The era of inexpensive abundant energy has ended."

Though the mood of the symposium was not despairing, it was somber. Some of the economists saw difficulties lasting well beyond 1974. Professor Pen suggested that 1974 "could be the first year of the new future"—one in which economists cannot automatically assume that there will be growth every year. If so, he fears, "many people who are now poor will have to renounce any hope of real progress" unless there is a massive redistribution of income.