Global Recession Is Threatening US Resurgence

Slowdown has weakened export markets and diminished capital-investment supplies. THE ECONOMY

JUST as the US economy appears to be gaining momentum, key European, Asian, and Latin American economies that provide the United States with important capital resources and markets for exports are slackening. And their troubles mean that America's economic recovery is in jeopardy.

Once the powerhouse of the global economy, the US is no longer strong enough to help pull other industrialized countries out of economic trouble.

In the coming year, the US could be the lone member of the Group of Seven (G-7) top industrialized countries - the US, Britain, Canada, France, Germany, Italy, and Japan - to show a marked increase in growth.

During today's monetary policy meeting, the Federal Open Market Committee - the policymaking group of the US Federal Reserve Board - will review a recent Federal Reserve report indicating "a slight-to-moderate pickup in some or all sectors," all in the context of remarkably low inflation.

Beyond looking at the US, analysts are urging President-elect Clinton to make strong calls for G-7 cooperation to create conditions for worldwide economic vitality. That means pushing for measures that the Bush administration has found near-impossible to achieve: convincing the dominant European and Asian economies to lower interest rates, open markets, and spend more on imports.

With Germany's concerns about igniting an inflationary cycle in its newly unified economy, the country's central bank - the Bundesbank - maintains tight hold of the reins. Worried that the higher interest rates in Germany will lure precious capital away from the US, Washington policymakers have spent the past several years imploring Bonn to relax its grip on those rates.

All of this has been to no avail. Germany has clearly indicated that it does not intend to redirect its domestic policies to suit the US. It has constantly chided Washington for the reckless fiscal policies it says are largely responsible for the US capital shortage.

"Beyond the immediate problem of German inflation, there is the much more serious problem that Europe is losing purpose," warns Rudi Dornbusch, a professor of economic at the Massachusetts Institute of Technology. He refers to the recent efforts by the European Community to stay on the difficult path toward economic and monetary union which have "been without success and with very, very bad politics."

In Europe's environment of uncertainty, Mr. Dornbusch says, business confidence is bound to slide and "that as a result for quite a few years, Europe will do very poorly." This will have a major impact on the US, he says, because Europe is home to America's major export markets.

Observers also warn that a Japanese recession may only reinforce the reality that the Japanese economy is very closed, especially to US goods. As the US-Japan deficit has widened, Washington has badgered Tokyo for a government fiscal stimulus designed to provide importers with more capital to purchase US goods and services. Prime Minster Kiichi Miyazawa promised to do just that, but getting the necessary laws through the Japanese Diet has taken too long. Dornbusch says the stimulus package that finally r eceived the Japanese parliament's approval this month delivered too little, too late.

Dornbusch adds: "Surely there is an implication for us that while Japan may be reluctant to use fiscal policy, notwithstanding five years of big budget deficits, notwithstanding an extremely small public debt, certainly we should ask that they don't export their problems to us with growing trade surpluses."

THERE are two other regional highlights for US policymakers. One is potentially the brightest, the other a possible blight.

Latin America, a crucial importer of US products in recent years, is slowing to 1.5 to 2 percent annual economic growth and demand for US imports is dropping. But, says Paula Stern, former International Trade Commission chairwoman and a candidate for Clinton's US trade representative, "Latin America is now our strong partner in efforts to achieve strengthened trading rules." The US has much to gain from pushing for a global trade accord and helping to foster a more robust economy to the South: its freer- trade policy and preference for US goods (the region spends 50 cents of each import dollar on US products).

The former Soviet Union presents formidable challenges, though. Lawrence Summers, a Clinton adviser who has been on leave from his post as the World Bank's chief economist, urges the new administration to take an active interest in promoting reforms in the ex-Soviet Union. Mr. Summers says assistance is crucial to averting financial collapse and reversion to nationalist rule. The aid "can make it possible to channel several hundred billion dollars a year that have been devoted to military spending to con structive investment," he says.