World Economic Slowdown to Ease In Second Half, OECD Forecasts
May 3, 2001
Business and Finance - Europe
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PARIS -- The world's major economies will begin to emerge from the current slowdown in the second half of this year, with growth picking up again in 2002, the Organization for Economic Cooperation and Development said Thursday.
The Paris-based group said that this "relatively optimistic" scenario could be threatened by further share-price falls in the U.S., rising household debt and falling investment. It predicted interest rate cuts in Europe and the U.S. if growth should slow significantly.
See more about the OECD Economic Outlook report on the OECD Web site at www.oecd.org1 .
Growth is expected to climb again in 2002 in Europe and the U.S., with Japan still struggling to recover.
"The forces dampening growth are projected to dissipate during the current half-year, and, except in Japan, a moderate recovery to take hold later this year," the OECD said in its twice-yearly report.
It said growth among its 30 member countries would drop to 2% in 2001 -- a greater fall than originally expected -- but would rise again next year to between 2.5 and 3%.
In its previous report last November, the OECD predicted growth this year of 3.3%.
The OECD said that interest rate cuts, tax reductions and the decline in oil prices would fuel the economic recovery.
It said the absence of inflationary pressures meant that the world's central banks would be able to cut interest rates further to support growth.
2 EU Lowers Forecast for Growth in Euro Zone to 2.8% for Year (April 25)
3 OECD Cuts 2001 Growth Forecast for Euro Zone to 2.7% From 3.1% (April 10)
The OECD expects a further "modest easing" of interest rates in the U.S. of around 25 basis points, or up to 100 basis points if the economy weakens considerably.
It forecast "some easing" of monetary policy in the euro zone in the coming months, predicting a 50 basis point drop in the key rate. A basis point is one-hundredth of a percentage point.
The U.S. Federal Reserve has sought to stave off recession by slashing its key federal-funds rate four times this year to 4.5%. Many economists believe another rate cut will come at the May 15 meeting of the Fed's policy-making Open Market Committee.
The European Central Bank has come under fire for not following suit, and has been accused of not helping to stave off a global recession. On Wednesday, the ECB said interest rates would stay "on hold" to avoid stoking inflation. Its key rate has been steady at 4.75% since October.
In Germany, the euro zone's largest economy, economic growth should rise to 2.5% in 2002 after falling to 2.25% in 2001, the OECD said. The German gross domestic product grew 3% in 2000.
The German economy is at the mercy of the export market, it said, with a buoyant export market driving 2000 growth and a flagging export market cutting growth this year. Risks from a slowing world economy justify at least one more cut in British interest rates despite an otherwise healthy economic outlook for the country, the Organization for Economic Cooperation and Development said Thursday.
Economic growth in Britain, meanwhile, is expected to remain relatively robust over the next two years, with inflation and unemployment remaining at historically low levels, said the OECD. But the risks from a slowing world economy justify at least one more cut in U.K. interest rates despite an otherwise healthy economic outlook for the country, it said.
The OECD said it had been surprised by the intensity of the U.S. slowdown, but warned that the gloom may still not be as great as confidence indicators and falling equity prices suggested.
In Japan, however, the OECD warned the economy is "at risk of entering a downward spiral" because of slower world growth, the lack of corporate restructuring and problems in the financial sector.
Japanese growth is expected to rise 1% this year and 1.1% in 2002. Growth last year was 1.7%.
The OECD predicted the U.S. economy will grow by 1.7% this year, against 5% last year, and 3.1% in 2002. Growth in the 12 European nations using the euro is expected to be 2.6% this year and 2.7% next.
"The central projection is relatively optimistic but the risks to the outlook are clearly on the downside," the OECD said.
These risks include the possibility that U.S. share prices will slump further, dragging global prices down and hitting confidence levels.
The OECD also warned of the dangers linked to the rising levels of debt held by U.S. households, saying this could hit spending.
"If these risks were to materialize, the slowdown in the OECD region would naturally become more severe, and monetary policy might have to become substantially more accommodative," it said.
Should the slowdown in the major economies become more severe, the OECD said Asia would be hit hardest given its dependence on technology-related exports.
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