Signs of recovery abroad may be good news Clinton and Democrats need

August 17, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- Finally, the first glimmer of an overseas economic turnaround has appeared on the horizon, and it may be just what President Clinton and the Democrats are looking for.

The struggling domestic economy, ever hostage to conditions abroad, is certain to be the decisive factor in the 1994 congressional and local election.

Mr. Clinton, who "lucked out" late last year when he was elected just as a slow economic expansion took hold here, appears set to benefit from the onset of an equally timely -- though equally slow -- overseas recovery.

The emerging evidence suggests that all three legs of the global economy -- the United States, Japan and Europe -- will be gaining varying degrees of strength simultaneously next year, reinforcing one another's growth potential.

When voters pass their first judgment at the ballot box on Mr. Clinton's policies, increased foreign demand should be helping offset the expected economic "drag" from the $241 billion tax increase in his new budget package.

"It's worth pointing out there's something building out there," said Diane Swonk, economist with First Chicago Corp., which has just raised its projection of U.S. economic growth next year from 2.5 percent to 2.75 percent. "Everyone is working with each other to try to bail out the boat right now.

"Whether or not all of these things interacting together are all of a sudden going to give us a boom -- I don't think that's going to happen. But it looks like we might get a little bit of help."

Consider these developments in recent days:

* The United States adopted a $496 billion deficit reduction package, much to the relief of its trading partners. The low-inflation, high-unemployment economy will keep interest rates here low, possibly inviting further cuts by the Federal Reserve should there be any signs of growth faltering.

* The new Japanese government of Morihiro Hosokawa signaled its willingness to consider a new stimulus package later this year, and committed itself to solving its trade dispute with the United States through economic growth, deregulation, improved market access, and encouraging consumer spending. Japan's economic planning agency has set a 1994 growth target of 3.3 percent, more than double the rate expected by most private economists.

* German Economics Minister Gunter Rexrodt predicted an export-led revival next year for his country's economy, flattened by the cost of reunification of East and West Germany. This year's 1.5 percent decline in German economic growth would be translated into a 1.5 percent positive growth rate next year, he said. Germany is the powerhouse of Europe, and a turnaround there would send positive ripples throughout Europe, a major U.S. export market.

* Britain, which devalued the pound and lowered interest rates last September to foster economic growth, reported strong consumer credit growth, fueling hopes that recovery there may be gathering strength without reigniting inflation.

* The Bank of France, resolute defender of what is known as the DTC "franc fort" (the strong franc), slightly lowered interest on overnight borrowing, and may be forced to lower rates further to spur growth, despite the fact that this would undermine the value of the franc.

The Clinton administration, like the Bush administration before it, has been pressing its major industrial trading partners, particularly the Germans, to adopt pro-growth policies, including lower interest rates, to increase global demand and widen U.S. export opportunities.

"Interest rates overseas should continue to fall," said Allen Sinai, chief economist with Economic Advisors Inc., Boston, Mass., in his regular "Financial Comments" newsletter last week.

This is not to suggest a global downturn that has visited high unemployment, hard times and huge frustration throughout the industrial world, is about to be replaced by a sudden explosion of economic activity of the sort that occurred in 1983 and 1984 after the last international recession.

Different factors will slow progress this time:

* In the United States, the tax increases approved by Congress earlier this month will exert some "drag" on an already weak economy and a strong dollar will hamper export sales.

* In Europe, the high cost of German unification, low productivity, rigid labor markets and high social spending will restrain the rate of revival.

* In Japan, the restrictive commercial system and business uncertainty over the new government will work work against expansion.

Edward L. Hudgins, senior economist on the Republican staff of the Joint Economic Committee, said: "It certainly is important and useful to have all the countries' recoveries going in the same direction at the same time."

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