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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (33490)	11/16/1999 7:59:00 AM
From: Les H	Respond to of 99985

OECD risk scenarios for U.S. economy biz.yahoo.com PARIS, Nov 16 (Reuters) - Following are three scenarios illustrating the wider consequences of specific risks to the U.S. economy as published by the OECD in its twice-yearly economic outlook. BOOM-BUST In this scenario the U.S. economy fails to slow and inflation accelerates steadily over the coming year. To bring it under control, the Federal Reserve has to raise interest rates sharply to around eight per cent (compared with six per cent in the baseline), which in turn induces a marked slowdown in the domestic economy and a rise in the dollar. As a consequence, stock market prices fall by about 25 per cent in the U.S. and by 12.5 percent in the other major OECD economies. Rather than a soft landing, the U.S. economy follows a pronounced cycle over the period to 2005. In the short term, stronger than expected demand and tighter supply conditions lead to an acceleration of inflation to around 3.5 percent, whilst higher domestic demand and a higher real exchange rate (by five per cent in 2001), induce a further significant deepening of the external deficit, to around 4.75 per cent of GDP in 2000. With monetary tightening, a stronger dollar and stock market weakness, the economy slows abruptly in 2001 and contracts by about 0.25 percent in 2002. Beyond this period, a subsequent easing of monetary policy as inflation stabilises permits a progressive recovery in growth, with some reduction in the current account deficit. In the short term, the recoveries in Japan and the euro area benefit from stronger US growth and a stronger dollar which more than offset the negative effects from stock markets; but this is short lived as the impact of the US slowdown feeds through and monetary authorities in Europe raise interest rates to meet rising inflation. However, following the subsequent weakening of activity and inflation, a relaxation of monetary conditions is possible from 2003 on, which permits a resumption of steady low inflationary growth. SIGNIFICANT WEAKENING OF THE DOLLAR Driven by concerns about the worsening US external position, the US dollar falls in this scenario by 20 per cent in the first half of 2000. The Federal Reserve is assumed to tighten monetary policy to contain the inflation risk and, as in the Boom-Bust scenario, stock market prices fall by 25 per cent in the United States and by 12.5 per cent in other major economies. Despite the stimulatory trade effects of dollar depreciation, the fall in financial wealth, inflation pressures and monetary tightening lead to a slowing of domestic demand growth in the short term. With inflation picking up to around 3.5 per cent in the near term, short-term interest rates need to be maintained at 8 per cent or more in 2000 and 2001 to get inflation under control. Nonetheless, the fall of the dollar and slowdown in US domestic demand lead to a significant improvement in the US current account deficit, to around 2.5 per cent of GDP. In the near term the recoveries in Japan and Europe are significantly weakened by currency appreciation and lower US demand. The effects are most pronounced in Japan, where room for monetary policy manoeuvre is quite limited and, without supportive fiscal policy action, real GDP growth falls to 0.75 per cent in 2000 and turns negative in 2001. In the euro area, the room for manoeuvre is greater and reductions in short-term interest rates are sufficient to limit the consequences for growth. Beyond the short term, monetary relaxation and the progressive firming of growth in the United States and the euro area, allow Japan to finally recover. The main counterpart to the improvement in the US current account position is seen in declines in the projected surpluses for the euro area and Japan. STOCK MARKET CORRECTION In this scenario, US stock market prices fall by 30 per cent at the beginning of 2000, and by 15 per cent in the other major OECD economies. In contrast to the previous scenarios, the Federal Reserve and the other main central banks are assumed to ease monetary policies significantly to support activity. In the United States, the weakening effect of the fall in stock market prices on domestic demand over the next two years is therefore partially offset by the effects of lower real interest rates and a lower US dollar, with growth reduced by about 0.5 percentage point in both 2000 and 2001 respectively. In spite of appreciation relative to the US dollar, the short-term slowdown in growth in the euro area is more limited, given a smaller impact of the fall of equity prices on consumption and investment. The overall impact in Japan is somewhat greater, because of the more limited room for monetary policy manoeuvre, with the GDP growth rate falling to below 1 per cent in both 2000 and 2001. Over the longer-term horizon, the simultaneous reduction in interest rates in the main OECD regions nonetheless allows a recovery in growth, with low inflation.