World economy rallies, yet joblessness mounts

THE world economy is set to take off, growing at its fastest rate this decade. Yet it may be some time until that growth rate translates into a significant number of new jobs.

In its July assessment of the world economy, a United Nations economic department concludes that the global economy will grow by a 2-1/2 percent annual rate this year and 3 percent next year. Economic strength in the United States will provide enough energy to boost the economies of Western Europe and Japan, which are slowly moving out of recession.

For the second consecutive year, the UN Department for Economic and Social Information and Policy Analysis expects the vibrant countries of Southeast Asia to lead the world in growth, headed by China with a 10 percent increase in gross domestic product.

``I think it adds up to a period of gradual return to more normal growth from the period of low growth in the 1990s,'' says William Cline, a senior fellow at the Institute for International Economics in Washington.

Despite this economic growth, unemployment will remain at record highs, the Paris-based Organization of Economic Cooperation and Development (OECD) predicts in a report issued July 19. The report forecasts that unemployment this year among the 25 nations that are members of the OECD will be 8.5 percent, or about 35 million people. Next year, however, the OECD expects unemployment to fall to 8.3 percent.

The key factors determining the shape of the world economy over the next 18 months will be the strength of the recovery in Europe and Japan, according to economist Michael Aho of Prudential Securities Inc. in New York.

Europe's recovery will depend on the Bundesbank, Germany's central bank. ``When they cut interest rates, everyone follows,'' says Mr. Aho, who estimates that Germany will grow by 2 percent this year and 2.5 percent in 1995. ``It's not a barn burner but it's better than the last two to three years.''

Japan's fragile recovery

Aho describes the Japanese economic recovery as ``fragile.'' At a time when the country's economy is teetering between recovery and recession, ``Clinton is beating them over the head on trade, so the recovery is very precarious,'' he says.

The fastest growth will be in Asia, particularly China, which grew at 13 percent in 1993. Mr. Cline says he wonders if China will start to experience imbalances because of the surging growth. ``There are inflationary pressures, income differences among provinces, and trade issues,'' he explains.

For example, as Chinese manufacturing becomes a larger part of international trade, there will be pressure for China to join the General Agreement on Tariffs and Trade, which sets the ground rules for international trade. ``At some point, the world has to come to terms with how it absorbs China,'' Cline says.

The second fastest-growth area will be Latin America, Aho predicts. He says he expects the region to grow at 4 percent to 5 percent annually. Latin America is benefiting from an uptick in commodities prices. For example, coffee prices have surged as a result of frosts in Brazil. This will benefit other large coffee producers such as Costa Rica and Colombia.

Some countries are proud of their economic muscles. Last week, Ralph Willis, the treasurer of Australia, told the Asia Society in New York that his country's economic growth would be ``close to the fastest'' in the OECD. He predicted growth of 4-1/2 percent for 1994-95.

At the same time, Mr. Willis says he expects inflation to remain in the 2 percent to 3 percent annual range. Although he says he expects interest rates to rise somewhat in the future, he adds: ``There will not be a need for interest rates to rise anywhere near the levels they have on occasions in the past.''

The economic growth path of the US will be a key factor in global interest-rate trends. In recent testimony before Congress, Alan Greenspan, chairman of the Federal Reserve Board, indicated that interest rates might have to rise to quell inflation. Many economists say, however, that the US economy will begin to slow in the third quarter to a 2.5 percent to 3 percent level.

While interest rates may rise in the US before year's end, economists don't expect substantially higher rates around the globe. ``Barring some unexpected shock, both interest rates and currencies are headed for a bout of near-term stability,'' says Gail Fosler, chief economist for The Conference Board, a business research organization in New York.

Higher profitability

In fact, Ms. Fosler says structural shifts will make the economic recovery more durable. These changes include the elimination of excess capacity, higher profitability in the business sector, and higher-quality balance sheets for both business and consumers. ``The expansion is not the result of government stimulus and therefore will not be easily managed by government restraint,'' Fosler says.

Instead, there is some concern among economists that there will be a shortage of capital to fund the global expansion. Since January, long-term bond yields in the developed countries have moved up by 1.5 to 3 percentage points. Although there are some inflation concerns, economist David Hale of Kemper Financial Services Inc. in Chicago says he worries about competition for funds.

``There is a potentially vast appetite for new investment in the countries now shifting to market-oriented economic systems, while the savings rates of the old industrial countries are declining because of large government deficits and eroding household thrift,'' Mr. Hale says. For the economic recovery to become a long-term reality, there needs to be a shift toward savings and investment, he says.