A worsening oil price situation has made the outlook for the world's economy substantially grimmer for the next year or more, the International Monetary Fund said yesterday in its annual report.
The IMF, which has major responsibility for international loans to hard-pressed countries, implied that a worldwide recession is in store because of the combined deflationary and inflationary results of the oil situation.
Since last year, the report said, oil prices quoted by the Organization of Petroleum Exporting Countries have risen to about $20.50 a barrel, up 60 per cent. The additional full-year cost in the aggregate oil import bill of consuming nations was estimated at $75 billion.
For the 24 industrial nations grouped in the Organization for Economic Cooperation and Development, the IMF said, that will mean "a generally depressive effect on economic growth." Compared to an expectation at the start of 1979 that the prior two years' annual growth rate of 4 per cent would dip only slightly, "now it seems clear that the decline in the industrial world will prove to be much sharper than had generally been expected."
The recent deterioration in world economic prospects, the report said, results not only from the sharper oil price increases themselves, but from the change in the forecast by U.S. officials, who now say the economy here will be in a true recession, not simply a slowdown.
"A U.S. recession (whatever its duration or severity) could not be offset in the other industrial countries; in general, their economies are not buoyant, and, because of either the fact or the threat of inflation, they would not be in a position to adopt significantly more expansionary policies in the endeavor to compensate for a recessionary development in the United States . . . ", the report said in one of its key conclusions.
No specific figures for world growth in the year ahead were supplied. But the OECD, after the June OPEC price increase, forecast a real growth rate of only 2 per cent in the industrial world by next July.
That represents a drop from an OECD estimate of 2.75 per cent growth, just prior to the June OPEC price boost. But since evidence of a U.S. recession and the expectation of weaker trends in Germany, Italy, and France came later, experts think the next OECD revision will be down again.
The consensus, however, is that whatever the measure of the world decline, it won't be as bad as the 1974-75 recession that followed the first oil price shock.
[During the weekend, the finance ministers and central bankers of the United States, West Germany, France, Britain and Japan conducted a secret meeting preliminary to the annual meeting of the IMF and World Bank in Belgrade at the end of this month.Among the themes discussed by the representatives were the emerging interest rate war in the leading industrial nations and the interrelated questions of the dollar and gold.]
Meanwhile, the condition of the poorer nations, already affected by sluggish growth for the past few years in much of the industrial world outside of the U.S., will be further weakened. The poor nations' oil bills are shooting up, and their exports will have rougher going in world markets during a general recession.
The problem of the steep run-up in oil prices, layered onto already existing world economic imbalances, "clearly foreshadows a period of severe strains in the world economy, emphasizing the need for policies to deal with them," the report said.
The report's authors acknowledged there are "no simple prescriptions" for the many and interlocked financial problems and in a rare confessional, admitted that the IMF's earlier prescription, going back to 1976, for a gradual approach to bring down inflation hadn't worked.
"The upshot has been that 'gradualism' as an approach to the reduction of inflation and inflationary expectations has been too 'gradual' -- in many countries, to the point of no reduction at all," the report said.
The report criticized the failure of many countries to get control of the money supply. Others had followed only a cautious fiscal policy, because unemployment as well as inflation had been a concern, according to the annual report. There was a mild rebuke to U.S. policy-makers because "withdrawal of stimulus" had been too gradual.
But when it came to the present dilemma, the report had no new answers, sticking with the recommendation that policy be "gradual . . . but not too gradual." The min goal of policy, it said, was not to let costs, including oil costs, work their way into the wage structure. It acknowledged that this is a difficult task, because it amounts to skng workers to take further cuts in real income.
The report said the IMF's managers and lending responsibilities would increase because loan demands would mushroom. But it indicated that it will have adequate resources to meet the demand.
The poor nations this year are expected to have a combined trade and services (current account) deficit of $43 billion, up $12 billion from 1978, while the OPEC countries, benefiting from high prices, will have a surplus of $43 billion, a whopping increase from $6 billion in 1978.
But West Germany and Japan are expected to experience sharp declines in their current account surpluses this year. As a result, the current account surplus of all industrial countries in the aggregate will fall from $33 billion in 1979, the report estimated.