Financial Post G7 Record

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[Financial Post G7 Record]

Financial Post, Weekly edition, Mon 17 Jul 89, page 11. Editorial.


Steady hand best

As usual this decade, leaders of the Big Seven industrial countries gathered for their annual Economic Summit this past weekend against a backdrop of dire predictions about the world economy.

No matter what is actually happening, the gloomy scenarios persist. But the scenarios are more in keeping with the early part of the 1980s, when the summit countries were in the grip of recession. Even the stock market crash of 1987 has not pushed the industrial economies back into the trough. Rather, the G7 members are into their sixth year of expansion.

Thus is not to say there are no problems to be confronted. There always are. But it's important that the positive signals not be ignored while the summiteers plan for the future.

As The Post went to press, it was certain the environment would be a leading item of discussion at the summit. It's fitting that this be so. But Canada also pressed the case for consideration of exchange rates, balance-of-payments deficits, trade, Third World debt, and structural adjustment issues.

Building on the discussion at the summit, the leaders can go on to address these and other concerns. The danger is that by ignoring the positive signs - particularly in the U.S. - the leaders will want to pull policy levers that shouldn't be touched.

For example, there still is lots of concern about the strength of the US$ and its woeful consequences for the U.S. trade deficit. But would a lower dollar magically put the U.S. into surplus? Not necessarily. Exports depend on quality, service, and reliability of supply as well as price.

The U.S. has adapted to its strong dollar by shifting the emphasis on its productive capacity - the services industry has strengthened and manufacturing has, in many cases, become leaner and more efficient. U.S. industry has more of a global focus. These are positive results of currency appreciation. They promise a more enduring strength to the U.S. economy than the boost to exports a cheaper dollar may give.

Even with the strength of the US$ over the past months, U.S. exports were up more than 15% in the first quarter. The fiscal deficit remains a major concern, but the savings rate has nearly doubled in recent months.

Similarly, although the Canadian deficit has yet to be seriously assaulted and inflation is moving higher, job growth is high, labor income and retail sales are strong. The danger in ignoring the sound points in the G7 economies is that fiddling with exchange rates could undermine much of what has been achieved.

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Revised: June 3, 1995

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