Year of surprise isn't the year it should have been


The year 1992 isn't the year it was supposed to be. It's been contrary enough to push even the pluckiest Pollyanna on the road toward psychotherapy.

The fall of the Berlin Wall and the failure of communism were expected to usher in a period of peaceful prosperity and economic unity. Instead, Europe and the rest of the free world are paying a high price, as Germany relies on lofty interest rates to avoid the inflation that might stem from unification costs. Recent currency turmoil and overall European disunity are the results.

The U.S. economy, spurred by remarkably low rates, was to have at last shown the resilience it lacked the past several years. Instead, consumers still aren't ready to consume because they lack the job security required to take a plunge into debt. The housing, automobile and retailing industries are suffering as a consequence.

The most predictable feature of living in the 1990s, it seems, is its unpredictability. "A world out of sync" is how it's characterized by Joseph Carson, chief economist with Dean Witter Reynolds Inc.

Don't expect the Maastricht treaty or other coordinated European efforts to neatly shore up currency conflicts long-term, as was once hoped. A "two-speed" European currency system, with stronger economies linked to the German mark, is seeming more likely. Other countries may go it alone. Dissension, after all, is the 1990s mind-set.

Don't expect the U.S. economy to suddenly click into gear, no matter who the president is next year. It's far more likely to move upward at its excruciatingly slow pace, causing pundits to smile one day and frown the next.

As we bask in the glow of this post-communist period, Europe will be fortunate to have 2 percent growth in its gross national product next year. The United States, stumbling along at a 1 percent or 2 percent growth rate in the second half of this year, may see its GNP move a little beyond 3 percent next year.

"Germany could slide into recession and pull France along with it," warned William Sterling, international economist with Merrill Lynch & Co.

"While our dollar has rebounded a bit due to European currency problems, and that gives the Federal Reserve more latitude to cut interest rates, it will really be our domestic economic situation that dictates such a move."

The dollar, despite some gains, is still not strong. Our exports should therefore still be aided by that relative weakness. Nonetheless, the 25 percent of our exports that go to Western Europe would obviously be hurt if those countries are in a near-depression.

"Most disturbingly, Europe seems increasingly likely to turn inward to sort things out," Mr. Sterling added. "This will make it harder for the U.S. to bargain with it on topics such as free trade and international security."

U.S. companies have put expansion into Europe on hold for the time being because of the uncertainties it represents, noted Mr. Carson. At the same time, they're not pushing expansion of operations at home either, since the U.S. economy isn't likely to improve soon.

"The economy in this country is barely growing," said Maury Harris, chief economist with PaineWebber Inc. "Election of Governor Clinton to the presidency might result in a somewhat ** improved Christmas retail season and a modestly stimulative economic package that would help move growth to 3.5 percent a year from now."

However, any near-term stimulation would be at the cost of lost personal savings due to a raise in marginal tax rates, he believes. Longer-term, tax shelters would make a comeback under a Clinton presidency and tax avoidance tactics would grow, he predicted.

As far as interest rates, no one expects any dramatic moves. Long-term interest rates could drift down a bit this year due to the poor employment situation, said Mr. Harris, who believes the bond market has already factored in a Clinton victory.

He expects long-term interest rates could increase to 7.50 percent and then 7.75 percent sometime next year. Rates in general would be higher in a Clinton administration, he said.

"Due to the overall world situation, I personally see our U.S. interest rates as pretty much on hold for now," added Mr. Carson.

A weak Europe settling for half a loaf of unity, and a slow-growing United States with a budget deficit for which no one offers a cure: It's just not what was expected.

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