For the last two years, the United States economy has been a locomotive pulling along the rest of the world's economies. Now there is a growing worry expressed by the other governments gathering for the economic summit here that the locomotive may be running out of steam.
American consumers and businesses bought so many goods and services abroad last year that the added purchases accounted for half or more of the economic growth in Japan, Canada, West Germany, Britain, France and Italy. Now, with the U.S. economy expanding at less than one-third the pace of last year, the other nations are beginning to seek domestic sources for growth.
The Reagan administration, while still forecasting a healthy 4 percent rate of growth of the American economy, is pressing the other industrial nations to take steps to stimulate their economies in a non-inflationary way. Many private forecasters believe U.S. growth will be lower, in the 2 percent to 3 percent range.
The administration wants the European nations to encourage more employment by reducing or eliminating some of the laws and regulations that make it costly and difficult to lay off employes, and to limit unemployment payments. The administration wants the Japanese, as Secretary of State George P. Shultz told Foreign Affairs Minister Shintaro Abe in a private meeting today, to reduce restrictions on investment that currently prevent Japan from absorbing all its savings. A large share of that savings is now invested abroad, and the capital outflow contributes to the large and growing Japanese trade surplus by depressing the value of the yen in foreign exchange markets.
Meanwhile, Italian Prime Minister Bettino Craxi joined the administration effort yesterday, telling reporters in Rome that he would urge West Germany and Japan to try to take up any slack caused by a slowdown in the United States.
Both those nations are expected to resist the pressure to give their economies a boost because they fear reigniting inflation. That is true in West Germany even though its current unemployment rate is above 9 percent.
German officials remember vividly the unfortunate results that followed former Chancellor Helmut Schmidt's agreement at the Bonn Summit in 1978 to use his economy as a locomotive in conjunction with similar actions by other countries. He did so just as the 1979 food and oil price shocks hit, doubling the German inflation rate within two years.
Nevertheless, the West Germans want to make sure that their economy keeps growing at at least a 2.5 percent rate, as it did last year after adjusting for inflation. Anything less than that likely would mean rising unemployment. Officials of the German Economics Ministry have quietly begun making contingency plans for stimulating the economy if export growth begins to slow to the point that it threatens the growth target.
The Japanese, who escaped the deep recession that hit the other summit countries earlier in the 1980s, had a strong 5.8 percent increase in their gross national product in 1984, after adjustment for inflation. This year, the Japanese government expects another 4 percent to 4.5 percent gain, with only about one-tenth of it because of rising exports.
Economic growth in Italy and Britain was similar to that in Germany, about 2.5 percent. In France, however, real GNP went up a weaker 1.8 percent. Canada's GNP rose 4.7 percent.
In every country, growth was stronger than it was in 1983, especially in Italy, which only last year emerged from its recession. And the faster growth was not accompanied by any sizeable increase in inflation. On an annual basis, prices rose somewhat faster in three countries -- the United States, Japan and Britain -- and fell in the others. The improvement was again most striking in Italy where the inflation rate fell from 15.1 percent in 1983 to 10.7 percent last year.
At last year's London summit, the heads of government said "the industrialized democracies continue to face the challenge of ensuring that the recovery materializes and endures, in order to reverse a decade of cumulative inflation and reduce unemployment."
Despite a very good year in 1984, the challenge remains. Unemployment is still above 10 percent in Canada, France, Italy and Britain. In fact, in Britain it is above 13 percent and has risen for five consecutive years, with a sixth forecast for 1985. Only in the United States did unemployment fall significantly last year -- and there has been essentially no decline in the rate since mid-1984.
Now the focus is on the question of how long the recovery in the industrial nations will endure.
The economic growth rate in the United States over the last three quarters was down to 2.4 percent, about the same as in the European countries. This sort of convergence of growth rates was an objective of both the last two summits. But the idea was not to achieve the goal by bringing down the highest rate.
Two other economic goals set at the London summit were reducing "structural" government budget deficits and reducing interest rates. There was progress on both in the last year, but both will come up again here.
Compared with a year ago, short-term interest rates have fallen significantly only in the United States and France, where they are down about 3.5 and 3 percentage points respectively. They have gone up by roughly an equal amount as a result of British efforts to support the value of the pound in foreign exchange markets.
Long-term rates are down anywhere from 0.8 percentage points in Japan to to 2.5 percentage points in Italy. However, relative to inflation, both long- and short-term rates remain unusually high.
In the United States, the spread between current long-term rates and common forecasts for inflation is in the neighborhood of 5.5 to 6 percentage points. This so-called real rate of interest is even higher in Canada and Britain. In the other summit countries, it is around 4.5 percentage points.
High real rates can discourage investment, and some economists believe they are doing so in the United States even though new tax incentives have offset much of that effect. Historically, real interest rates have been around 3 percent, though with considerable variation. During some parts of the 1970s, when investors did not believe inflation would remain high, real rates were negative.
On the budget side, 1984 was the first year since 1979 when the combined fiscal deficit of the seven nations went down. But the improvement was largely the result of the combined economic recovery rather than based on the underlying, cyclically adjusted basis. That is, deficits went down because economic resources were more fully employed, not because of spending cuts or tax increases, according to an analysis published this week by the International Monetary Fund.
In general, fiscal policy remained highly stimulative in the United States and moved in that direction in Canada and Italy. In the other nations policy shifted in the direction of restraint, the IMF said.