(FORTUNE Magazine) – The American economy is shifting from a high-speed hustle to a sedate waltz, and the effects will be felt worldwide. Last year's roaring growth produced something for everyone. The recovery remained virtually inflation free and kicked off new growth in both industrial and developing countries. The other 23 countries of the Organization for Economic Cooperation and Development -- the major industrial nations -- got about half their growth last year from exports to the U.S. Now demand in these countries is expected to pick up. If it doesn't, the world recovery could lapse into a two-step. The U.S. economy looks less lustrous because the surge in demand for consumer goods and capital equipment helped push the trade balance out of whack. Furthermore, an epic federal budget deficit attracted a rush of capital from abroad, much of it from economies flush with export earnings. This race into dollars lofted the currency, making imports still more attractive and bloating the current account deficit to a projected figure of almost $120 billion this year. The capital inflow will likely make the U.S. a debtor nation in 1985 -- the first time that's happened since World War I. Some of these imbalances have begun to correct themselves, as the charts on these and the following pages show. The trade deficit has sapped growth in the U.S., and waning confidence in the economy has made the dollar less almighty. For the U.S. and most of its trading partners, a weaker dollar is desirable and long overdue (see The Economy). It gives European countries the chance to stimulate investment by cutting their own interest rates, which they have kept high to prop up their currencies. A dollar that doesn't just sag but plunges, however, would force the U.S. to raise interest rates again, spurring inflation. Trading partners would have a lot more confidence in the U.S. if it could control the swollen federal budget deficit. The Recovery Loses Some Get-Up-and-Go America's main trading partners will follow the U.S. pattern of recovery, some lagging just a little, others a lot. Adjusted for inflation, the average growth of the European OECD economies will be just 2.25% this year and next. In 1984 exports to the U.S. accounted for about half the increase in European output. But the U.S.'s appetite for consumer goods and capital equipment has waned; total demand is projected to grow just 3.8% this year, vs. 8.7% in 1984. The European economies will now be fueled more by stronger investment and consumer demand at home. GNP in the U.K., for example, will grow just over 3% this year as the country recovers from a slowdown brought on by the miners' strike that ended in March. The recoveries in West Germany and France won't peak until 1986. Germany is turning out to be the most stable of the industrial trading partners. GNP growth is expected to slow only half a percentage point this year, then pick up again in 1986 as exports continue to increase at a vigorous rate. Japan's vulnerability to a cooling U.S. economy will show up much more quickly because of the strong, if controversial, trade link between the two countries. Last year Japan sent 35% of its exports to the U.S., vs. 24% in 1980. The Last of the Big Spenders Heavy government spending helped fuel the U.S. recovery -- but created a deficit that, as a proportion of GNP, surpasses those of welfare states like the U.K. and France. The charts below, which reflect the combined balances of local, state, and federal governments, disguise the magnitude of central government spending. In Germany, for example, last year's federal budget deficit of $9.9 billion equaled 1.6% of GNP; deficits in state and social security budgets brought the total to 2.3%. In the U.S., by contrast, state and local government surpluses will offset a portion of the $190-billion federal budget deficit for calendar 1985. In fact, Washington's big spenders are responsible for a federal deficit that is approaching 5% of GNP. And if Congress and the Reagan Administration aren't able to reconcile their differences on next year's spending, the figure will get even bigger. Superbuck Takes a Tumble The slowing U.S. economy has sent the dollar on the longest and steepest drop since 1980. Between its peak in February and mid-July, the dollar fell 15% against a market basket of major currencies. However, that was still 66% above its mid-1980 level. The long decline of key currencies against the dollar wasn't fully reflected in export prices: exporters to the U.S. let prices rise, fattening profit margins, while U.S. exporters couldn't afford to mark down goods enough to keep competitive. Topsy-Turvy Trade Even before the dollar took flight into the stratosphere, strong consumer and business demand for imports steered the U.S. toward a trade deficit. These charts, which show changes in the trading partners' balance on current account (exports of goods and services minus imports), hide one small piece of good news for the U.S.: exports are actually growing. But imports are growing faster. The balance of trade on goods deteriorated 76% last year and will continue to slide 9% this year and 16% next. And the balance in services is worsening: this year's surplus will be about one-quarter of the 1983 level, partly because of heavy interest payments on foreign capital invested in the U.S. The current account balance, as a result, will widen by some 20% this year. America's Buying Spree The enormous U.S. demand for imports generated an export boom last year for other countries. Among the biggest beneficiaries: Japan (autos and electronics) and Mexico (oil and food products). Total exports to the U.S. climbed 26%, vs. a 6% increase worldwide. As the U.S. recovery flags, this boom could become a sputter. Developing countries are in a particularly precarious position. If other markets don't absorb their exports, they will have a hard time servicing their mounting external debt. Chasing Japan Japan remains the world productivity leader because of relatively high capital investment, dramatic output growth, and a favorable tax structure. The recovery in the U.S. boosted productivity gains, but not enough: they're still worse than anywhere else except the U.K. Next year productivity growth will slow for all countries except West Germany, where some industries will be cutting back on manpower. Help Not Wanted The recovery isn't doing much for the armies of the unemployed in most OECD countries. Total employment in Europe rose in 1984 after four straight years of decline. Yet the number of new jobs hasn't matched growth in the labor force, so unemployment remains the highest in 50 years. Even though demand is picking up, European employers are reluctant to hire because of restrictions on layoffs that make overstaffing costly in a downturn. The U.S. is faring better: last year's exuberant expansion shrank unemployment two percentage points, and the growth of service jobs is keeping it from creeping up now. Japan -- of course -- is faring best of all. Keeping Labor Costs at Bay Wage increases lost much of their zip in most industrialized countries last year as union membership declined, unemployment rose, and inflation eased. In the U.S., wage settlements were the lowest in 17 years. But the strong dollar prevented that from helping the country's competitive position: measured in dollars, unit labor costs among U.S. trading partners have been falling while America's have held steady. Japan's relative costs are also inflated in the world marketplace, since the yen has been stronger than European currencies. Measured in their own currencies, unit labor costs in France and the U.K. have been climbing, although France's cost spiral is tapering off as the French chip away at their wage indexation. Leaving Inflation Behind Breaking with the past, this recovery left inflation at the starting gate. Weak oil and other commodity prices, along with tight monetary policies and wage restraint, kept consumer price increases in the OECD countries lower than in the recession year of 1982. Prices increased moderately even in countries whose currencies weakened against the dollar. Usually a depreciating currency boosts inflation as import prices rise, and as industry produces more goods for export and fewer for home consumption. But domestic demand in Europe and Japan hasn't been strong. The U.S. followed a more predictable pattern; cheaper imports helped hold down all consumer prices.

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