Is The Worst Over?

THE SIGNS ARE TENTATIVE; THE EVIdence is sometimes shaky. But finally a consensus is building that the ailing economies of Europe and Japan may be limping, slowly and painfully, toward recovery after years of recession. The balloon of prosperity is not fully off the ground, but hopes are lifting.

That is good news for the entire world. Even with the U.S. well into its recovery, the slump in Japan and Europe has dragged down the global economy, hurting demand for raw materials and other export goods from developing countries. But last month the Organization for Economic Cooperation and Development (O.E.C.D.) reported that it was revising upward its 1994 growth estimates for Germany, the powerhouse of the European economic engine, from 0.8% annually to 1.8%. The organization now predicts the Japanese economy will expand 0.8% in 1994 -- last year it grew 0.1% -- and the European Union 1.9%, vs. a drop of 0.3% in 1993. In a welcome note of optimism, last week the ever cautious Bundesbank declared that the "recessionary tendencies in the West German economy appear to have been overcome."

Most of the recovery will be led largely by corporations, not consumers. Throughout the E.U. and Japan, voters still have only shaky confidence in their economies, which typically means their checkbooks will stay closed. But thanks to a surprising boost of exports in Europe and successful cost cutting in Japan, many companies expect an improvement in corporate profits by the end of the year. This should eventually spark further growth. "Things began to turn toward the end of the year, and the signs have multiplied since then. This is a recovery that is gathering pace and is still being underestimated," says Ian Harwood, director of global strategy for the S.G. Warburg investment house in London. "It won't be derailed."

Maybe not, but cracks in the foundations of these economies could yet cause shudders in the nascent recovery. In Japan deflation continues to haunt the economy as banks struggle to cope with swollen portfolios of bad debts. Many Japanese firms still suffer as well from excess capacity and bloated payrolls. In Europe high interest rates, fueled by the bond market's fear of an outbreak of inflation, could still put the brakes on the recovery.

Even in the best of circumstances, the lift-off will not be pretty. Growth will stutter more than roar. And unemployment rates, which will reach an estimated 11.7% this year in the E.U. and 2.8% in Japan, will decline only after the economic recovery has been better established. Herewith, tidings from the various fronts:

JAPAN

"I feel things are beginning to move. I have a gut instinct about it," says Shizue Tanaka, whose family runs Tanakatei, an upscale restaurant in Tokyo's posh Akasaka area. Tanaka's sentiments are now shared by most influential businessmen: a quarterly survey by the Bank of Japan, which tracks the mood in boardrooms, recently reported the first upturn in business optimism in five years. "The possibility is strong that the economy has moved one step toward recovery," says Bank of Japan governor Yasushi Mieno. "But we must carefully watch the sustainability and tempo of the upturn."