Economic Outlook, 1995

January 09, 1995

The economic outlook for the world's industrial nations in 1995 could hardly be better. Growth is steady, inflation is under control, trade is expanding. While Europe, though plagued by high unemployment, and Japan are just emerging from rTC recession, the U.S. is into its fourth year of recovery -- a recovery marked by strong job growth.

Keeping the U.S. economy on a steady keel as long as it can is the Federal Reserve Board, which raised interest rates six times in 1994 without triggering a downturn and is likely to ratchet rates up a couple times more. The 25-nation Organization for Economic Cooperation and Development assumes U.S. short-term rates, which rose from 3 percent to 5.5 percent in the past year, will increase to 6.7 percent.

If such is the case, the intention is to slow down the U.S. economy's hot 4 percent growth rate to about 2.7 percent -- considered an ideal level for holding inflation in check at about the same level. But there are concerns in many quarters that high interest rates could short-circuit the recovery. Managing an economy is more art than science.

Several factors are cause for optimism. After eight years of frustrating negotiation, market-opening trade reforms of unprecedented magnitude are about to begin. With formation of the World Trade Organization, tariffs will be lowered substantially and rules that have promoted commerce in manufactured goods will be extended to agriculture and many service industries. U.S. exports, having jumped 13 percent in 1994, should continue to rise as the European and Japanese economies recover. But the buoyancy of the U.S. economy will prolong trade deficits of unsustainable proportions.

In the political arena, the election of a pro-business, low-tax, anti-regulation Republican majority in Congress points to a further boost in the economy. Democrats and Republicans alike are promising a middle-class tax cut which might offset some of the pain of higher interest rates. But the downside is that such fiscal largess could reverse the trend of lower deficits and arouse inflation fears.

What really fosters improved economic performance is not political tinkering or even Fed interest rate adjustment. Of far greater importance is a technological revolution that is pushing productivity to astounding heights as tidal waves of capital outside government control flow across borders. This revolution forces jolting disruption and job change upon millions of individuals, but the long-range payoff is prosperity in advanced nations.

Is this outlook too good to be true? In a turbulent world, where most of humankind barely survives, where oil supplies are always at risk, tensions between rich and poor could cause upheaval damaging to the global economy. But the Third World will, at least, have increased access to rich markets.

All in all, 1994 was a year to celebrate and 1995 promises to be almost as good or better.

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