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OECD cuts growth forecasts, sees recovery soon

The Organisation for Economic Co-operation and Development on Thursday slashed its 2001 growth forecast for member states to 2.0 per cent from 3.3 per cent previously, but said it saw a pick-up in the US economy allowing a modest recovery later this year.

"The central projection is relatively optimistic, but the risks to the outlook are clearly on the downside," the OECD said in its twice-yearly Economic Outlook.

The organisation's previous, higher estimate for growth in its 30 member states this year was made last November, but an unexpectedly sharp deterioration in the US economic outlook has taken place since then.

The OECD saw growth across the bloc halving from 4.1 per cent in 2000, but expected it to rebound to 2.8 per cent in 2002 as the impact of interest rate cuts and lower oil prices kicked in.

It said slower growth, combined with a drop in energy prices from last year's highs, should help keep a lid on inflation.

The OECD said it now forecast the US economy would grow by 1.7 per cent in 2001, down from an earlier forecast of 3.5 per cent and sharply below last year's 5.0 per cent growth.

Those forecasts assumed the US Federal Reserve would continue easing, albeit at a slower pace, after a series of aggressive interest rate cuts aimed at stemming the slowdown.

OECD chief economist Ignazio Visco sounded a cautiously optimistic note. "At this stage, the gloom observed by markets may be greater than warranted by hard economic data," he told reporters at a news conference to present the figures.

The OECD said in its report that with an easier stance of economic policy, "a (US) recovery seems likely to take hold in the second half of the year."

But it warned: "A major risk to this picture is that more fundamental imbalances are present, either in the United States or elsewhere, which will require more severe and protracted adjustment or that could be seriously aggravated by what might otherwise be a mild slowdown."

In the United States, rising household debt levels and further stock price falls could frighten consumers and require larger interest rate cuts from the Federal Reserve, it noted.

Business leaders could also scale back their investment plans after a tech-led boom that saw many firms overspending and has since led to a rash of lay-offs and profit downgrades.

JAPAN FALTERING, EUROPE STILL ON TRACK

The OECD said the US manufacturing slowdown had caused a sharp slowdown in world trade, most markedly in Canada and Mexico, Japan and emerging Asian economies such as South Korea.

The Japanese economy, struggling for years with bad loans, was "faltering and at risk of entering a downward spiral" as weakening external demand exacerbated the fragile domestic situation, the OECD said.

It forecast Japanese growth of 1.0 per cent in 2001, down from 1.7 per cent last year. That represented a sharp revision of the OECD's November outlook, which had predicted an improvement in Japan's prospects with growth of 2.3 per cent this year.

Visco said there was little scope for the Japanese government to stimulate growth through traditional macroeconomic policies, and it should focus on tackling structural problems.

"It is not possible for policies in Japan to be much more stimulative than they are now," he said.

Europe's leading economies were also likely to see slower growth this year, although prospects remained healthy providing there were no nasty shocks from abroad.

The Paris-based OECD said it expected growth in the 12-nation euro zone to slow to 2.6 per cent this year and 2.7 per cent in 2002 from 3.4 per cent in 2000. That compared with an initial forecast of 3.1 per cent growth in 2001.

The forecast assumed a small rate cut by the European Central Bank as inflation pressures receded, it said.

"The firming of the foreign exchange value of the euro since November and the drop in oil prices, coupled with a less buoyant external environment, should reduce inflation pressures in the near term," the report said.

That would also give the ECB room to cut rates again if the slowdown were to intensify, the OECD said.

UNEVEN PROSPECTS

Growth in Germany, the euro zone's largest economy, was set to slow to 2.2 per cent this year and 2.4 per cent in 2002 after registering 3.0 per cent in 2000.

The French economy, which has resisted the US slowdown better than other core euro zone economies, was seen expanding by 2.6 per cent this year and 2.7 per cent next year, down from 3.2 per cent in 2000.

For Britain, outside the euro zone, the OECD said it saw growth on a par with France at 2.5 per cent, with a similar increase to 2.6 per cent in 2002. The British economy grew 3.0 per cent last year.

Outside the main economic power centres, the OECD said it saw the Turkish economy contracting by 4.2 per cent in 2001 after expanding 7.2 per cent the previous year, reflecting the collapse of its International Monetary Fund-backed loan deal and currency devaluation.

But the economy should return to growth of 5.2 per cent in 2002, providing the government implements structural reforms to restore confidence and allows real interest rates to come down.

For Russia, which has been struggling to emerge from a deep financial crisis in 1998, the OECD predicted growth would slow to 3.0 per cent this year from 7.7 per cent in 2000 as firms faced rising energy and transport prices and a strong rouble.

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