A significant improvement in the U.S. trade deficit, and "a major reduction" in the surpluses of Japan and West Germany by 1980, caused largely by wide shifts in exchange rates, were predicted yesterday by the Internationl Monetary Fund.
In its annual report, the IMF said that changes in exports and imports lag so far behind the changes in currency values that the U.S. deficit could actually widen this year, despite the depreciation of the dollar.
The IMF and the World Bank will hold a joint annual meeting in Washington September 25-28, when these and other international economic issues detailed in the annual report will be discussed.
On the whole, the report struck a relatively somber tone, saying that the initial recovery in the industrial nations following the 1974-75 recession had petered out.
The past year had been marked by imbalances in rates of growth and inflation, especially as between the United States on one hand, and other industrial nations on the other, the report said.
One of the consequences of "the faltering pace" of recovery is that the volume of world trade over the past 18 months has been increasing at only a 5 per cent annual rate, compared with 12 per cent in 1976, and a 9 per cent average in the decade ending 1972.
"These circumstances presented a number of serious hazards, "the report said. At another point, it referred to the "ominous" growth of protectionism, and said that the over-all, the world was confronted with "a very difficult and potentially dangerous situation."
To deal with these problems, the annual report re-stated the recommendations first put forward at the IMF Interim Committee in Mexico City last April. This "scenario" calls on the industrial countries as a group to reach for higher and more closely matched growth rates. The United States, however, with less slack, is expected to slip in 1979 below its recent high growth pattern.
The report recommends a co-ordination of economic policy effort, and applauds the commitment to that end agreed upon in July at the Bonn economic summit. In any event, the report says that "it is of crucial importance that actual developments accord at least broadly with those envisaged" in its scenario.
In dealing with the "disturbing instability" of exchange markets, the report contains a long section on the new Article IV, which came into effect April 1, 1978, creating a surveillance mechanism for exchange rates.
What was disturbing, the report says, was "not so much the nature of the realignment that took place, but the speed with which it occurred, and the disorderly and uncertain exchange market conditions that characterized the (1977-78) period."
It warned that while each member under Article IV is bound to "promote a stable system of exchange rates", it is easier said than done." "There still is a significant difference between the objectives of the amended articles and the state of the world economy.
It went on to note that currency intervention alone, even if on a larger scale than in the past, won't offset volatile exchange markets. The conclusion was that restoration of more stability "awaits both the restoration of economic stability at the national level and a significant reduction of the existing large current account balances among the industrial countries."
In that connection, the report presented a table of exchange rate changes and wholesale manufactured price changes in 14 industrial countries that showed how shifts in exchange rates after the impact of different inflation rates.
That study demonstrates how important exchange rates are for countries with a very high or very low inflation rate. Thus, Germany, Japan, Belgium and Switzerland with very low inflation rates lost all or most of the competitive edge they would have had because of the substantial appreciation in their currency rates.
On the other hand, the United States, France, Norway, Sweden and Canada had substantial improvements in price competitiveness not because their inflation rates were low, but because their currencies had depreciated.
From the second quarter 1976 to second quarter 1978, U.S. prices after adjustment for dollar depreciation were down 8.2 per cent, Canadian prices were down 12.1 per cent, Germany prices were up 3.6 per cent, and Japanese prices soared 14.5 per cent as a result of changes in the Canadian dollar, deutschemarks, and yen.
In its exhaustive review of developments in the world economy, the report also made these points:
One important factor in the uneven pace of economic recovery in the industrial world is the weakness of investment demand, which derives "at least in part from an impairment of the profit position."
Three years after the low point of the 1974-75 recession, there is a substantial "underutilization" of resources in the industrial world, especially outside the United States, running to an average of about 15 per cent for the six other "summit" countries. For Germany, it was 9 per cent, for Japan, about 20 per cent, for the United States about 5 per cent.
Echoing an observation by the World Bank, the IMF said that Third World countries grew about a 5 per cent rate in 1977, compared to 3.7 per cent for all industrial countries (and 2.1 per cent in Europe). The Third World pace is expected to be maintained this year.
Surpluses of the oil exporting countries dropped to $35 billion in 1977 from $41 billion in 1976, and are expected to drop to $20 billion this year. But deficits of oil importing countries, which had receded to $22 billion in 1977 from $25 billion in 1976 are expected to rise again, hitting $30 billion in 1978.