Ahead: Growth and Danger

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For months, portents have flashed across the financial heavens, feeding expectations of renewed vigor for the sluggish world economy. The price of oil has been in free fall, lifting a multibillion-dollar burden from industrialized and Third World countries. International interest rates have been dropping steadily, clearing away yet another obstacle to growth. In the U.S., the declining dollar has been named a harbinger of strengthened international competitiveness, meaning that the country's bedraggled manufacturing and farming sectors would once again revive and help refuel the world's foremost engine of economic expansion.

Yet for all those optimistic signs, many of the major economies are showing unmistakable signs of stress and strain. The drop in oil prices in the U.S. has stunned energy-producing regions and hurt a wide range of industries, from real estate to banking. Last week alone brought several seismic shocks: the bankruptcy filing by LTV, a major steel producer; the failure of First National Bank of Oklahoma City, a large oil-patch bank; and the $640 million loss reported by BankAmerica, which is saddled with numerous bad energy loans (see ECONOMY & BUSINESS). The dislocations caused by plunging oil prices have become a drag on the entire U.S. economy. Since January, the level of industrial production has dropped 2%.

The decline of the dollar has at least temporarily derailed the mighty export machines of West Germany and Japan. As the relative value of their currencies has risen, their products have become more expensive in the U.S. Partly for that reason, West Germany's gross national product decreased 1% in the first quarter, and Japan's .5%, its first contraction in eleven years.

Against that backdrop of unexpected economic malaise, TIME last week assembled its U.S., European and Pacific Boards of Economists for a two-day session in New York City. The joint meeting, the first of its kind, brought together 19 distinguished economists from 13 countries plus Hong Kong for an unusually comprehensive examination of the non-Communist world's prospects. A special guest at the meeting was former Secretary of State Henry Kissinger, who discussed how political forces are affecting the economic outlook.

Despite the current troubles, the consensus of TIME's economists was that the industrial nations would soon feel the benefits of cheap oil. Growth is likely to pick up in the second half of the year, modestly in the U.S. and more robustly in Europe and Asia. But the economists acknowledged several threats to their predictions, including an increase in global trade protectionism, the long-running Latin American debt crisis and the still rising U.S. budget deficit. In the words of Walter Heller, chief economic adviser to Presidents Kennedy and Johnson, the forecast was "at best, one of muted or at least well-tempered optimism."