The entire industrial world has now fallen into recession, the one great cause of which is the doubling of oil prices in 1979. The first effect of the higher oil prices was another surge of inflation. Nearly all of the rich countries have responded with restrictive counterinflation policies. They are working -- but very slowly, and at great cost.
Inflation throughout the industrial countries now averages about 11 percent.
Over the next 18 months it's likely to drop two or three percentage points -- an improvement, but still a higher rate than in 1978, before the oil crisis. Meanwhile, unemployment is high in most of these countries and will be worse by 1982.
This assessment is offered by the OECD, the economic scorekeeper for the 24 rich and near-rich countries that dominate the world's industrial and trading economy. the OECD -- the Organization for Economic Cooperation and Development -- twice a year audits their collective prospects. Cheerless as it is, even the new forecast depends on a highly uncertain assumption -- that oil prices will rise no faster than inflation.
The 1979 oil price increases, and the responses to them, will hold the combined output of these 24 rich economies about 6 percent lower than it would otherwise have been. In dollars, that's about $550 billion -- which translates into fewer jobs and lower standards of living than these countries would otherwise have been able to achieve. That's the true price of the imported oil.
In Japan, as you'd expect, output and productivity growth will be down a little but will remain at least twice as high as anywhere else. That will keep Japanese unemployment extremely low. In the United States, the recession seems likely to end early next year but, because the recovery will be very slow, unemployment will rise a little to about 8 percent. For France and Germany, the outlook suggests even less growth and a greater rise in unemployment -- although in Germany it will remain low by French, or American, standards. The greatest damage will probably be in Britain. The British unemployment rate averaged 2 percent in the 1960s, and 4-plus percent in the 1970s. But it's already over 9 percent and it may be over 12 by the summer of 1982. That's a depression rate by any definition.
After the first oil crisis in 1973-74, the industrial countries that make up the OECD knew that they had to reduce drastically their dependence on oil. But they feared that it would dislocate their economies and raise unemployment. So they procrastinated, and trusted to luck, and blamed each other when the luck ran out. Now the bills for the second oil crisis, in 1979, are coming due -- and they are enormous. Perhaps it's worth more than people once thought to push the world's economies -- especially the American economy -- away from imported oil.