Higher Interest Rates Stall Global Growth

Concerns about slower European growth may also need to be put in perspective. While the expansion may be failing to fulfill earlier expectations, European growth may still top 3 percent this year, the European Union executive commission forecast recently.

Private economists agree.

"We expect economic growth to trend upwards at 2-3 percent for the main economies," said Michael Hughes, director of strategy at Barclays de Zoete Wedd, the U.K. investment bank. "The risks of recession are low."

While activity does appear to have slackened in Germany, Europe's largest economy, that reflects higher income taxes rather than a slumping economy. Even as demand slows, Germany's supply side _ employment growth, improved or increased productive capacity _ remains healthy. That's also true of France, another leading European economy.

Meanwhile, in Europe's weak-currency states _ Britain, Italy, Spain and Sweden _ rates are expected to rise somewhat further, to choke off quickening inflation stoked by falling exchange rates.

The devaluation of the Mexican peso in December has caused interest rates to rise and economies to slow throughout Latin America. The Mexican economy grew just 0.6 percent in the first quarter after a 4 percent surge in the last three months of 1994. The consensus of five Mexican research firms is that the economy will contract 4.3 percent this year.

Argentina _ in a bid to maintain its currency tied to the dollar _ has allowed interest rates to rise and money in circulation to shrink, slowing growth. Argentina Economy Minister Domingo Cavallo recently said the economy is in a recession. Still, Cavallo predicted the economy would rebound and post growth of 3 percent for the year.

Brazil is in a similar dilemma. The government pegged its currency to the dollar last July as part of an anti-inflation plan. While consumer prices have fallen, now the government is struggling to stem a flood of imports that have resulted in seven consecutive months of trade deficits. Latin America's largest economy is expected to grow 6.4 percent this year, according to the Institute for Applied Economic Research, linked to the planning ministry.

Inflation is slowing in China, but not quick enough to convince analysts the economy is headed for a soft landing.

After recording an inflation rate of 24.1 percent last year, China said May's prices had risen 17.6 percent in May compared to the previous year. Analysts predict that slower growth in China's state-owned companies should rein in inflation.

Gross domestic product for China grew at an annual rate of 11.2 percent in the first quarter, down from the 11.8 percent rate recorded in all of 1994.

The growth outlook for Japan is somewhat different. Salomon Brothers cut its projection for Japan's 1995 GDP growth to 0.1 percent from an earlier 2.5 percent. J.P. Morgan now says Japan will grow 0.8 percent this year, instead of 1.7 percent.

Government authorities insist that the recovery is intact. The Bank of Japan put an overtly positive spin on the mixed results of its influential "tankan" business survey of 10,000 executives released June 9.

The survey showed that managers at large companies are more optimistic than they were three months ago and that they plan to spend more money on capital investment this year, the first increase in spending plans in four years.

On the other hand, the survey showed that small and medium-size companies, which make up the bulk of Japan's economy, are more pessimistic. Also, companies of all sizes say they still have too many unproductive workers and are worried that consumers aren't buying.

Many analysts argue that more drastic measures are needed, including increased deregulation, changes in the tax laws, the scaling back of pension benefits and the use of public money to help banks write off some 40 trillion yen in nonperforming loans.

"In the end, the government will have to do something," said Geoffrey Barker, head of research at Smith New Court in Tokyo, "and the market is going to push them into it."

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