Treasury Secretary W. Michael Blumenthal yesterday predicted that the U.S. current account deficit will decline "on the order of 30 to 40 per cent" in 1979, a result that he said would lead to a stronger dollar.
Blumenthal's remarks, at the joint annual meeting of the World Bank and International Monetary Fund, appeared to be a tonic for the dollar in exchange markets, which has weakened earlier in response to the absence of any concrete new dollar-defending measures in President Carter's speech on Monday.
But many of Blumenthal's banker-financial audience reacted with caution, suggesting that exchange markets were waiting for an actual turning point in the trade and current account statistics.
Blumenthal told a press conference in advance of his speech that the U.S. current account deficit would be $18 to $19 billion this year, up from $15 billion in 1977. The reduction he projected - which he said was a "conservative" estimate - would bring the red ink total down to a range of $11 to $31 billion.
The U.S. current account balance represents the surplus - or deficit - of trade and investments flowing in and out of the country. It has replaced the old balance of payments as the most important measure of a nation's international economic health.
Blumenthal attributed the prospective improvement to slower U.S. growth, which will reduce total imports; a declining rate of inflation in the second half of 1978, compared with the first half; hopes for energy legislation; and the new export promotion program announced yesterday by President Carter.
At a White House briefing, Carter said that "our export problem has been building for many years, and we can not expect dramatic improvement overnight." But he and Secretary of Commerce Juanita Kreps said that the Government would provide modest new incentives, and reduce disincentives to exports.
In separate interviews with the Washington Post, West German Finance Minister Hans Matthoefer and French Minister of Economy Rene Monory reacted cautiously to Blumenthal's optimism.
Matthoefer agreed that a reduction in the U.S. current account deficit, as projected by Blumenthal, will help the dollar. But he made clear that he felt that a "turning point" - and a change in speculative attitudes - would not come while there is still any sizeable deficit, or before inflation is controlled. Matthofer said he believes the dollar is undervalued, and the D-mark overvalued. He said that "one day" the markets will come to realize it - but only when U.S. policy is moving in the right direction.
Monory said he was "pleased" by Blumenthal's optimistic report, but said he would be "even more pleased" when some of the U.S. commitments on energy and inflation bear actual fruit.
Monory's comment was typical of the reaction after both the Carter and Blumenthal speeches. In essence, foreigners said rhetoric alone would not suffice to restore confidence in the dollar. Once again, Blumenthal yesterday was not able to add details on the Administration's anti-inflation program, or even clarify the prospective timing.
At first, he would tell reporters only that the President would announce the anti-inflation program "in the foreseeable future." When pressed, with a reminder that there was anxiety in the world to know more details, Blumenthal said:
"Well, all I can say is that I expect that to be soon. That is a decision the President must make. He hasn't as yet made it. Certainly, I don't anticipate him to wait for a long time, for many weeks, so I think it's a matter of a relatively short period of time . . . I just don't know. He hasn't told me, he hasn't told anybody when he wants to announce it. We will just have to wait."
Other Administration officials said that the President was now likely to delay announcement of his anti-inflation plans until the tax and energy bills are completed and Congress has recessed.
Blumenthal's speech stressed the strong performance of the U.S. economy in the past two years, in which it has come closer to full employment than have Germany, Japan and other major countries.
But he acknowledged that a lower growth rate is now anticipated for 1979, with the gain in real GNP dropping from just under 4 per cent this year to 3.5 percent next year.
He vigorously rejected the notion, in response to a press conference question, that U.S. policy for next year risks a recession. On the other hand, he acknowledged that he is concerned by high interest rates, and said that the U.S. "would have difficulty" if interest rates rise further.
One reason for a "tough and very concerted" anti-inflation program, he pointed out, is "to take the pressure off monetary policy."
On international monetary affairs, both Blumenthal and British Chancellor of the Exchequer Denis Healey noted that almost all of the world's financial leaders were somewhat more optimistic than they had been just a few months ago in Mexico City.
Although economic growth is still sluggish in many countries, and inflation high, a smoothing out of international payment about, in part because of big swings in the exchange rates of the dollar, yen and D-mark. Blumenthal said that "1979 may well be a year in which there are smaller imbalances than in any year in the recent past."
In a speech late Monday on behalf of both his own country and the Common Market (Germany at the moment holds the presidency of the European Council of Ministers) Matthoefer made the point that further adjustments in payments imbalances "will crucially depend on developments in the energy field."
Matthoefer also used the occasion to discuss the European Monetary System (EMS), which he said will contribute to world-wide stability by providing "a zone of greater stability in Europe."
Matthoefer and other Europeans have spent a good deal of time at these sessions explaining and "selling" the system to American officials, who have been dubious about it. Both Carter and Blumenthal went out of their way to indicate an open mind, stressing their expectations, as Blumenthal put it, that the EMS would "contribute to the strengthening and stability of the global monetary system and to the central role of the IMF within that system."
Matthoefer, Healey, and others stressed that there was no intention to set up a system that would rival the IMF or to establish a reserve currency that would affect the dollar.