§ I turn first to international developments. Nineteen ninety one saw the weakest growth in the major seven economies in a decade, while industrial production in the 746 G7 actually fell. This brought a sharp slowdown in the growth of world trade, which was exacerbated by the dramatic events in the former Soviet Union.
§ In the United States recovery was generally expected in the second half of last year. But, despite low interest rates, the upturn failed to appear towards the end of 1991. High levels of debt have made firms and households very cautious about spending, while banks have been reluctant to increase their lending.
§ In Japan there have been similar problems, and growth has slowed sharply. In the year to January, industrial production actually fell by 4 per cent.
§ The slowdown in world growth has been accompanied by lower inflation in nearly all the major economies. G7 inflation fell from over 5 per cent. at the beginning of last year to about 3 per cent. now.
§ But economic developments in continental Europe have been dominated by events in Germany. Over-rapid expansion of domestic demand, following reunification, led to a rise in German inflation. The German authorities responded by increasing interest rates and Germany has now moved into recession. As a consequence, other European economies are experiencing high real interest rates and weak domestic demand.
§ But falling inflation, and the cuts in interest rates that have already taken place in north America and Japan, will in time lead to a pick-up in confidence and demand. And as the underlying level of German inflation abates, I expect to see reductions in European interest rates.
§ Gross domestic product in the seven major economies is projected to grow by about 11/2 per cent. in 1992, and world trade by about 4 per cent. We can expect more rapid growth in later years as the recovery gains momentum.
§ Some have argued that delayed recovery in the United States, and the slowdowns in Japan and Europe, are not just a cyclical phenomenon of the kind we have seen before, but herald something much more serious. It would be irresponsible for anyone in my position simply to ignore such claims. But I do not believe that they are well founded. I believe that Governments have learned the lessons of the past. Above all, they recognise that nothing could be more damaging to the world economy than a relapse into protectionism of the sort that we saw in the 1930s.
§ Indeed, a crucial challenge for Governments is not merely to preserve the world trading order, but to extend it. Unfortunately, not all our Community partners see this as clearly as we in Britain do. But narrow sectional interests must not be allowed to prevent the current GATT negotiations from reaching a rapid and successful conclusion. The prosperity of the world in the decades ahead rests squarely on the freedom to trade.