Except for the major Arab oil producers, the world economy already is showing the signs of increasing strain, a forerunner of a widespread slowdown resulting in sluggish growth, higher unemployment, uncertain money markets and no real relief from inflation in 1980.
This is the consensus view just two weeks ahead of major international monetary conferences in Belgrade, Yugoslavia, where the World Bank and International Monetary Fund will conduct their annual meetings.
There will be an extension of the dialogue, as well, between the rich and poor nations when the so-called "Group of 77" -- representing 115 developing countries -- meets at the same time in the Yugoslav capital.
But few short-term solutions are expected to emerge from Belgrade, although the authorities are expected to set in motion a long-term process that eventually will ease some of the speculative pressure on the dollar in world currency markets.
The basic underlying problem of the moment -- the relentless upward surge of oil prices, which has severe inflationary and deflationary effects -- will not be solved by the finance ministers of the rich or poor nations in Belgrade.
If there is a glimmer of hope in the current world outlook, it is because not all major nations are at the same stage of the cycle. As Treasury Undersecretary for Monetary Affairs Anthony Solomon pointed out in an interview, both Germany and Japan still are showing considerable economic strength. Those countries set themselves on an expansionary course at the Bonn economic summit in 1978.
But some worldwide downturn cannot be escaped. "Any time you have the kind of oil price increase we've had," Treasury Secretary G. William Miller said, "the world economy will slow. It appears that the Organization of European Cooperation and Development countries will not be in a recession, but there will be some slow-down." The general expectation for real growth in calendar year 1980 in the OECD is no better than 3 per cent.
In the past few years, growth in the industrial countries has been close to 4 per cent, and for the 1960s, the average was about 4.5 per cent -- enough for jobs to keep pace with larger populations.
But oil price developments have altered prospects. The price tag for OPEC's increases since 1978 is estimated by IMF Managing Director Jacques de Larosiere at $77 billion a year -- $65 billion added to the net import bill of industrial countries, and an extra $12 billion that must be paid by the poorer developing countries.
In a recent speech in Geneva, Larosierie estimated that this "tax" levied by OPEC will add 1.5 per cent to the price level in the industrialized world, and "may generate a marked acceleration of the wage-price spiral."
An August analysis by the Amex Bank Review suggested that the U.S. and Germany will best be able to resist such a spiral, whereas price pressures will be greater in Italy, Britain and France. But dealing with inflation -- whether it is in the U.S., Germany, Italy, France, or the United Kingdom -- will cause serious problems for political leaders.
The OECD itself in its last official forecast in July, just after the last OPEC price increase, which boosted prices 60 per cent above 1978 levels, put growth prospects for the OECD area at only 2 per cent between mid-1979 and mid-1980. That revised downward an earlier forecast for 2 3/4 percent growth.
For the balance of this year in the OECD area, the agency's economists put the inflation rate at 10 per cent, with the international current account (services plus trade) deficit running at a rate of about $40 billion in the second half of 1979.
As bad as that sounds, some private forecasters think that the situation has deteriorated even more since midyear, largely because the United States has clearly entered a genuine recession. As of last July, the hope at OECD (and in Washington) was that the United States might get by with merely a slowdown.
The fact that economic prospects in the rest of the developed world are relatively brighter than in the United States enters as no surprise. The United States enjoyed, until now, nearly five years of uninterrupted economic growth while other countries were in the doldrums. This was an important factor in the generation of the hugh recent U.S. trade deficits, because the active U.S. economy attracted imports from abroad, while American manufacturers had trouble selling into sluggish markets.
The reversal of the cycle was part of the Bonn economic summit plan. However, the shock of a 60 per cent rise in OPEC prices accelerated a planned U.S. slowdown, limited the potential gains in Japan and Germany, and exacerbated the inflation problem for everybody. World leaders were not well-prepared for the new challenge at the Tokyo summit, as they awaited the specifics of the June OPEC price increase they knew to be inevitable. Nor do they seem any better prepared at the moment, except to let the world-wide slowdown run its course, and hope that OPEC, in its own self-interest, doesn't make things worse.
"What we can foresee now for the near term," says international trade specialist Harald B. Malmgren, "is an almost incredible combination of accelerated inflation, recession, decline in real incomes and in demand, turbulence in currencies, uncertain monetary policies, and serious balance-of-payments problems for both rich and poor courntries, without the normal anticycylical cushioning processes fully at work."
Among the uncertainties is the future course of oil prices and availability. The pessimists expect another OPEC price rise this year and worry even more about new interruptions in the supply line. The optimists expect steadiness in OPEC prices for a year or two, then resuming a rise of 5 to 10 per cent a year, with no interruptions in supply.
In a recent interview, Treasury Secretary Miller, clinging to a forecast of a mild U.S. recession, admitted that the one uncertainty that could plunge the U.S. and the world into deep economic disarray would be a major new interruption in oil supplies.
Solomon agrees with an analysis by Japanese Ministry of Finance aide Michiya Matsukawa that whatever happens to the world economy in the next year, it won't be as bad as the 1974-75 recession. In part, this is due to the strength of the Japanese and German economies.
Solomon expects the Japanese economy to grow at the rate of 5.5 per cent in the next year or so. Matsukawa's forecast is even a bit brighter -- a rate of about 5.8 per cent, with the help of a strongly expansionist fiscal policy.
In Germany, economic growth is expected to run close to 4 per cent in the last half of 1979, edging down, however, to less than 3 per cent in the first half of 1980. Both Germany and Japan have done a better job so far than the United States in absorbing the impact of the oil price shock.
Solomon also points to some plus factors: of major importance, the extremely heavy and destabilizing current account surpluses enjoyed by Japan and Germany for the past several years will be eroded in 1980. Together, Japan and Germany are expected to be about in balance or even to show a small combined deficit.
Meanwhile, the record U.S. current account deficit of $14 billion (adjusted figure) for 1978 may be cut in half this year and turn into a slight surplus in 1980, despite higher oil prices, as the United States enjoys an export boom led by agricultural products. Once again (as was true in 1974-75) the most horrendous balance of payments problem will be that left at the doorstep of the poor countries, who may be in the red by $35 billion or more.
An open question relates to the future of the dollar, which was shaky in July from the combined effects of the OPEC price increase, and worldwide uncertainty generated by President Carter's Cabinet shake-up.
But the dollar has recovered about half of its July losses, despite the spectacular bulge in gold prices. It used to be that the dollar would drop automatically drop when gold skyrocketed. But that no longer is true, in part because the United States, since Nov. 1, 1978, has made clear that while it will not peg a fixed dollar rate, it will not sit by and see a precipitate decline, either.
In concert with West Germany, Switzerland, and Japan, the United States now has a "managed floating policy," intervening heavily in foreign exchange markets to help prop up the dollar.
As Business International points out, this is a step away from "free floating," and toward the old fixed-rate system. It is not the only such step: the Europeans, with a new monetary system of their own (EMS), are trying to band their national currency rates closer together.
It is not clear how this will all come out, although the EMS has already imported European inflation into Germany, which sported an incredible and un-Germanic 7.5 per cent annual consumer inflation rate for the first half of 1979.
Yet anouther step toward stabilizing exchange rates is expected to result from the one concrete achievement of the annual IMF-World Bank Meeting: the establishment of a substitution account in the IMF. The idea is to create a means by which central banks holding surplus dollars can turn them into the IMF for a reserve asset priced in special drawing rights, the paper unit created by the IMF. After long hesitancy, the United States has come around to support of this plan.
"We are commited to maintaining a sound and stable dollar," Miller told The Washington Post. "It's behaved well under very difficult circumstances." Privately, leading officials add that the dollar will never again be allowed to drop as sharply as it did last Nov. 1.
This implies that officials will ignore the deflationary impact of high interest rates if necessary to support the dollar. This new attitude pleases foreigners, who say that if the administration's determination doesn't erode, exchange rates may be relatively steady even if the world goes through a mild recession in the next year or two.
But as world financial leaders prepare for the Belgrade meeting, there is a degree of skepticism that even Federal Reserve Chairman Paul Volcker will be able to pursue an austere monetary policy if unemployment deepens in the United States.