Most economists offer a sober evaluation of global prospects for 1986, forecasting a year not much better than the disappointing 1985.
"And that," warned Brookings Institution international expert Lawrence Krause, "assumes an accommodating monetary policy in the United States."
As World Bank economic analyst Jean Baneth put it, "The world economy is faced with the prospect that the remarkable recovery witnessed in 1984 may be petering out. However, there is a possibility -- even a probability -- of avoiding a recession if the major industrial countries act in a coordinated way to foster growth through better economic management."
A few analysts, such as Jack Albertine, president of the American Business Conference, and Wall Streeter Sam Nakagama of Nakagama and Wallace Inc., have a brighter perspective.
In part, those who see at least a small improvement over 1985 base their hopes on Treasury Secretary James A. Baker III's twin initiatives: a new infusion of loans for the 15 most severely indebted Third World nations, and the decline in the dollar that followed last September's meeting in New York of the Group of Five industrial nations.
These more "positive thinkers" also tend to believe that West Germany will turn in a better-than-expected performance that will help offset a relatively sluggish year for Japan and a so-so year for the United States.
Albertine and Nakagama see West Germany as an engine of economic growth in Europe. Where many others see Europe as still suffering from "Eurosclerosis" -- a disease thriving on high labor wage rates and high tax rates -- Nakagama insists that "Europe looks great, and West Germany looks terrific. Japan and the United States have been the hares, and Europe the tortoise," he said.
With the benefit of a sharp decline in commodities prices (which hurt the Third World countries last year) and lower interest rates and oil prices, "the tortoise will be coming along rather well," he said.
Even France will do well, said Nakagama: "People aren't accustomed to seeing France do well. But here you have a socialist government that has brought inflation down dramatically."
Albertine, on the other hand, thinks that France, which will suffer from appreciation of the franc against the dollar, will have a growth rate of only 2 percent.
Like others, Nakagama admits that the United States will continue to be the main influence on the global economy. "If I had to worry about 1986 ," he said, "I'd worry more about the United States."
The general hope is that an agreement among the major nations to bolster other currencies against the dollar, hold interest rates down and resist protectionism will accelerate the volume of world trade and provide a spur to growth. But as Baneth said, "concerted action to follow through on the September initiative might prove more difficult than the beginning made in New York."
Already, there are signs that neither West Germany nor Japan wants to see the dollar go down any further (it's off about 25 percent from the early 1985 peak), which would limit the beneficial effect that a cheaper dollar rate would have on the revival of American exports.
In any event, the scorecard on trade may prove a disappointment this year. Paula Stern, chairwoman of the International Trade Commission, said in an interview that "there have been such structural changes in the U.S. economy in this period of the super-dollar that even with the dollar coming down, we are still going to have tremendous pressures [for protectionist legislation]."
C. Fred Bergsten, director of the Institute for International Economics, predicted in an interview that the 1986 trade deficit, contrary to the hopes expressed by some, will exceed the $150 billion 1985 deficit unless the dollar declines again by about as much as it did last year. Exchange market experts believe that Japan isn't willing to let the yen weaken beyond the 200-to-$1 level.
"If the Group of Five doesn't signal that it wants the decline in the dollar to continue," Bergsten said, "the dollar will start to go up again, and it will be harder to move against it when it is going up."
The difference between the cheerier Albertine-Nakagama perspective and the consensus forecast is small in percentages, but as Krause points out, could make an enormous difference to the Third World. "When you add up all of the variables," Krause said, "things could be a touch better in the industrial nations or a touch worse. But a 1 percent swing could have one hell of an impact on the developing countries."
Most of the experts perceive recurring difficulties among at least some developing countries in handling their debt problems, and many insist that further declines in the dollar exchange rate will be needed to produce any significant relief from the huge American trade deficit.
In a series of projections issued by Baneth for the World Bank, the United States would show a real GNP growth of 2.5 to 3.0 percent (or about equal to 1985), or less than the 4.0 percent forecast just issued by Economic Council Chairman Beryl Sprinkel. That would translate into a growth rate in the 2.7 percent to 3.2 percent range for the industrial nations as a group, or comparable to the 2.8 percent now estimated for 1985, which was down sharply from 4.9 percent in 1984.
A year ago at this time, the global economy had just finished a highly satisfying year, one of recovery from a below-par 1983, and optimism prevailed that the surge would continue.
But, as Baneth observed, "the promise has been belied": global economic growth last year -- heavily influenced by a sharp slowdown in the United States -- fell back to the 1983 pace, resurfacing the Third World debt problem, which some optimists a year ago were sure had been solved.
Without some further decline in interest rates, most experts feel, there will not be the necessary stimulus to the U.S. housing industry and to local government spending. And on the international side, unless interest rates come down, there will not be the additional decline in the international value of the dollar, needed to regenerate the competitive ability of American industry. And the interest-rate pattern is intimately connected with the American political debate over the budget deficit.
In assessing the possibilities for lower interest rates -- crucial to accelerated growth in rich and poor countries alike -- the conventional wisdom in Washington is that Paul Volcker and the Federal Reserve Board will be willing to push interest rates lower only if they see actual progress in the reduction of the U.S. budget deficit through the Gramm-Rudman-Hollings process. This waits first on a test of the constitutionality of Gramm-Rudman-Hollings, and then on the ability of the president and Congress to make the painful budget-cutting process work.
According to data assembled by the World Bank, the growth rate in the Third World will dip to about 3.8 percent this year from 4.1 percent in 1985, and 5.4 percent in the banner year 1984. The U.S. Treasury, however, anticipates a slight gain in the less developed countries, with further improvement if the price of oil weakens further.
Treasury Assistant Secretary David Mulford stresses the potential benefits this year of a drop of roughly four percentage points in the Third World borrowing rates. Since much of the Third World debt is in the process of being rolled over, this decline will have its main benefits this year, he said. Each one-point drop in the basic international loan rate generates $2.5 billion to $3 billion in annual savings for the 15 major debtor countries, Mulford said.
IMF Managing Director Jacques de Larosiere pointed out that the financial problems in Latin America have been exacerbated by social tensions. "This is a region where the population and labor force are growing rapidly [2 and 3 percent, respectively]," de Larosiere said. "Even with the recent recovery, per-capita incomes are considerably below pre-crisis levels for the region as a whole. We are therefore entering a period when growth will be just as necessary to sustain adjustment as adjustment will be to sustain growth."
But if the forecasters are right, growth in the Third World this year and next will be difficult to achieve.
Most assume the same 2.5 percent to 3.0 percent growth performance in Europe, marginally up from 2.3 percent in 1985 and 2.4 percent in 1984; while Japan is not expected to top 3.0 percent, down from 5 percent in 1985 and 5.8 percent in 1984. In fact, according to Bergsten, Japan -- experiencing a post-war high of 3 percent in its unemployment rate -- may have a sharply lower economic growth rate, below 3 percent. "Japan will do well to hit 3 percent," Krause said.
Albertine agrees with Bergsten and Krause on Japan, but is more bullish on West Germany, where he sees growth close to 4 percent "on the basis of robust investment and strong consumer spending. Germany will be the engine of economic growth in Europe, and its demand for imports will give the rest of the continent a boost."
Albertine also said that a major international story this year will be the emergence of South Korea as a major economic force, with the possibility that the Asian nation will score a 6 percent growth record, on its way over the next 10 years "to rival Japan as the economic leader of the Pacific."
The more modest consensus view is that the combined 1986 performance of the industrial nations outside of the United States is not likely to offset the American decline recorded since 1984, when a seemingly insatiable American consumption drove imports here to new highs, providing one of the main "locomotives" for the recovery in Asia, Europe and the Third World.
And for that reason, a main theme of American international economic policy -- which will surface once more at the Tokyo Economic Summit May 4-6 -- will be to urge Japan and the European economies (especially West Germany's) to take more stimulative actions, in the hope that Japanese-European expansion will help reduce the American trade and current-account deficits.
If these deficit numbers stay high, Bergsten and other economists agree, pressures for protectionist legislation will rebuild. Last year, these pressures were effectively defused by the Reagan administration with a combination of coordinated efforts to bring the dollar down and a reinvigorated attack on unfair trade practices of other countries.
Krause also said the dollar should be allowed to decline more, but takes a slightly more optimistic view on this point than Bergsten, assuming that the amount of the decline already registered will keep the trade deficit from growing higher this year.
So far, West Germany and Japan, fearing a regeneration of inflation or of enlarging budget deficits, have resisted dramatic steps to boost their economies, and the consensus of global forecasts reflects a belief that the American pressure on them to do so will not be very effective.
Another major factor in the global economy this year is the fall in commodity prices, including the price of oil. Although some prescient economists last year (as well as earlier) predicted that OPEC would self-destruct, and that the price of oil would drop sharply, few believed that it would happen. But oil last year dropped from a posted price of $29 to about $23 to $24 a barrel, and is expected to move even lower this year. Some expect to see oil below $20 a barrel, moving toward $15 a barrel.
The oil price slide cuts two ways: It has helped to move the inflation indices and interest rates lower, acting as a stimulus to global economic activity -- the reverse of the process that set in when OPEC moved oil above the $35 level in 1979 and 1980, helping to trigger recession in those years. But lower oil prices adversely affect Latin American producing countries such as Mexico and Venezuela, while helping Third World oil-consuming countries such as Brazil.