Recession in the industrial world will take a sizable chunk out of individual real incomes this year, but there is at least a chance that the West will come out of it in better shape than at the end of the first oil-shock recession.
That's the current assessment of key economists here at the Organization of Economic Cooperation and Development, which represents 24 industrial nations, including the United States. The assessment will be reviewed at a ministerial policy meeting in Paris this week.
The effect of last year's oil price increases on OECD inflation indexes probably peaked last month. A simple calculation is that the Organization of Petroleum Exporting Countries' new price bite has cost the Western World consumer an extra $150 a year. But beyond that, a 3 percent reduction in real growth by mid-1980 caused by OPEC will cost the equivalent of another $250 a person.
Thus, for a family of five, the total effect of the second oil-price shock is a $2,000 reduction in the standard of living or about 5 percent of real income over an 18-month period. Until recently, Europeans (like Americans) had been digging into their savings for that $150 a head. "But the other chunk is still to hit them, and they'll feel it more as incomes are pinched and some of them lose jobs," says an economist.
Nonetheless, the top ministers gathering here this week for the first in a series of meetings that will culminate in mid-June in Venice for the presidential summit will gain a glimmer of optimism from the OECD report.
Acknowledging that in the present delicate state of political turmoil around the world anything can happen, economists cite at least three factors that should ease the ultimate pain:
First, West Germany and Japan are moving into substantial current account (trade and services) deficits as the OPEC nations build their surpluses. These strong countries are best able to afford the red ink. Last time around, a weaker group of European nations -- England, France and Italy -- ran the large international deficits.
Second, most major governments appear willing to stick to a nonaccommodating, tighter monetary policy without rushing to stick to the Keynesian spigot.There isn't unanimity on the view. With elections coming up in Germany, France and the United States, the more cynical observes expect some kind of pump-priming policies in all three countries.
Third, despite high inflation rates, labor unions everywhere have been following cautious and responsible wage policies. Whatever their rhetoric, labor leaders increasingly agree that big jumps in money wages can be counterproductive. In Japan after the first oil shock, wage increases jumped about 30 percent, which almost immediately was translated into a 25 percent increase in inflation. Now the Japanese wage increase seems to be in the 7 percent to 8 percent ballpark.
The view here is that the United States has been a bit too pessimistic about the world outlook, forgetting that as a result of concerted action at the Bonn summit there was a miniboom in Europe from about mid-1978 until this year. In Germany last year, for example, the economic growth rate was about 4.5 percent and inflation was only 3 percent.
Now the 100 percent OPEC oil price increase has changed all of that, and a recession is building force -- just how strong remains to be seen.