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Published online by Cambridge University Press: 26 March 2020
Our last forecast, which was published in August, was moderately optimistic about prospects for the world economy, and especially for the United States. Since the summer the Yen has risen strongly, the US has begun to look like it is facing a recession, and it is now clear that the united Germany will face a very large Government budget deficit after monetary and political union. Meanwhile prospects for war in the Gulf remain high, and although EC farm ministers have managed to agree amongst themselves about cuts in agricultural subsidies it is not clear that these cuts are large enough either to prevent the GATT round stalling or stop the US erecting trade barriers in retaliation. As a result of all these factors our forecast is hedged around with rather more uncertainties than usual. Table 1 sets out our short-term forecast. We assume that oil prices will peak at $35 pb in the last quarter of 1990, and will then fall to $28 pb by the end of 1991.
(1) All forecasters have revised down their projections for the US. A number of forecasts are given below.
(2) The divergence of real interest rates is not inconsistent with our assumption that the ERM hardens and becomes a monetary union. Nominal interest rates have to converge, but the relative price of goods may still change. This implies that inflation rates may differ, albeit it only slightly, between regions, and hence real interest rates will also differ slightly. We are of course assuming that the speed of arbitrage for nominal rates and for goods exceeds that of capital. We also observe that the supply of capital for investment is not infinitely elastic.
(3) This statement has to be qualified by the remote possibility that the Saudi Arabian Government is overthrown by Iraqi sympathisers.
(4) Over half of the cuts have already been implemented.
(5) This may be based around the Committee of European Central Bankers at the BIS which has already begun to appoint a secretariat. They are also about to produce a draft constitution for a European Central Bank.
(6) There is, of course, no such thing as irrevocably fixed exchange rates. The monetary union between the United Kingdom and Eire survived for some decades after the abolition of a common central bank, but eventually the authorities in Eire decided to withdraw from the monetary as well as the political union.
(7) The Dutch did realign slightly in 1983. See table 1 in the note on the EMS in this Review.
(8) Losses on this scale cannot all be the result of lending on poor security, and some must be the result of large scale intentional fraud.
(9) The growth of GDP in the old Federal Republic will exceed that of GNP. The increase in cross border commuting will mean that some domestic product is paid as factor income to residents outside the old Federal Republic. The potential 400,000 commuters could put an extra wedge of ½ per cent between GDP and GNP in 1991. This effect will only disappear when the national accounts of the two Germanies are unified.
