OECD cuts growth forecast
Friday, 7 December 2007
Scheherazade Daneshkhu
FT Syndication Service
The world economy is reeling from a succession of blows which will cause growth to slow in 2008 to its lowest rate in five years, according to the Organisation for Economic Co-Operation and Development.
But the Paris-based think-tank said this week that the world's 30 wealthiest economies were in a good position to absorb much of the shocks emanating from turmoil in the financial and housing markets and higher energy costs. They owed such resilience to a world trade that has remained bouyant, high employment and recent high rates of corporate profitability, it said.
Jørgen Elmeskov, acting head of the economics department, said the organisation had cut its growth forecasts virtually everywhere but the outlook was "actually not that bad in view of the recent shocks". In its twice-yearly Economic Outlook, published on Thursday, the OECD said it now expected growth in the 30-nation area next year of 2.3 per cent, down from its May forecast of 2.7 per cent.
This would be the weakest performance since 2003, when the world economy grew by 1.9 per cent as it emerged from the fall-out caused by the bursting of the technology bubble in 2000. It expected a slight upturn, to 2.4 per cent, in 2009 and held its growth estimate for this year at 2.7 per cent.
But it warned that there were big risks to this relatively benign outlook, emanating in particular from housing and financial markets and rising commodity prices. It expected stock markets to remain volatile in the face of re-pricing of risk caused by tighter credit conditions.
"Regulators and supervisors will need to balance the desire for a rapid restoration of confidence in balance sheets of financial institutions against the risk of triggering a severe retrenchment in credit supply. In due course, the lessons will have to be drawn as to whether and how the regulatory framework around the model needs to change to prevent its malfunctioning in the future," the OECD said.
It advised the US Federal Reserve and the European Central Bank to hold interest rates, even at the price of exacerbating an economic downturn, to avoid higher inflation becoming ingrained in the public psyche and wage claims.
"The continued anchoring of inflation expectations cannot be taken for granted," according to the report. "If signs were to emerge that inflation expectations are drifting up, it might be necessary to pay a price in terms of lower activity in the short term to preserve this vital policy asset."
However, it said that the Bank of England "can probably afford to ease monetary policy without risking additional inflationary pressures". It expected interest rates in Japan to stay at 0.5 per cent until 2009.
The OECD expected the US would escape a recession although growth would fall and unemployment would rise "modestly". In May, the OECD had expected the US economy to grow by 2.5 per cent in 2008 but it cut that forecast by 0.5 percentage points. It hoped the US Federal Reserve would resist another cut in interest rates until well into 2009 when it expected the housing market to have recovered.
In the eurozone, the OECD expected growth to fall from 2.6 per cent this year to 1.9 per cent in 2008, recovering to 2 per cent in 2009.
It called on the ECB to hold its main rate. "Policy rates are assumed to remain unchanged over the next couple of years as near-term growth is expected to weaken below the potential rate and past appreciation of the euro together with fading impacts from oil and commodity prices help contain inflationary pressures.," it said.
FT Syndication Service
The world economy is reeling from a succession of blows which will cause growth to slow in 2008 to its lowest rate in five years, according to the Organisation for Economic Co-Operation and Development.
But the Paris-based think-tank said this week that the world's 30 wealthiest economies were in a good position to absorb much of the shocks emanating from turmoil in the financial and housing markets and higher energy costs. They owed such resilience to a world trade that has remained bouyant, high employment and recent high rates of corporate profitability, it said.
Jørgen Elmeskov, acting head of the economics department, said the organisation had cut its growth forecasts virtually everywhere but the outlook was "actually not that bad in view of the recent shocks". In its twice-yearly Economic Outlook, published on Thursday, the OECD said it now expected growth in the 30-nation area next year of 2.3 per cent, down from its May forecast of 2.7 per cent.
This would be the weakest performance since 2003, when the world economy grew by 1.9 per cent as it emerged from the fall-out caused by the bursting of the technology bubble in 2000. It expected a slight upturn, to 2.4 per cent, in 2009 and held its growth estimate for this year at 2.7 per cent.
But it warned that there were big risks to this relatively benign outlook, emanating in particular from housing and financial markets and rising commodity prices. It expected stock markets to remain volatile in the face of re-pricing of risk caused by tighter credit conditions.
"Regulators and supervisors will need to balance the desire for a rapid restoration of confidence in balance sheets of financial institutions against the risk of triggering a severe retrenchment in credit supply. In due course, the lessons will have to be drawn as to whether and how the regulatory framework around the model needs to change to prevent its malfunctioning in the future," the OECD said.
It advised the US Federal Reserve and the European Central Bank to hold interest rates, even at the price of exacerbating an economic downturn, to avoid higher inflation becoming ingrained in the public psyche and wage claims.
"The continued anchoring of inflation expectations cannot be taken for granted," according to the report. "If signs were to emerge that inflation expectations are drifting up, it might be necessary to pay a price in terms of lower activity in the short term to preserve this vital policy asset."
However, it said that the Bank of England "can probably afford to ease monetary policy without risking additional inflationary pressures". It expected interest rates in Japan to stay at 0.5 per cent until 2009.
The OECD expected the US would escape a recession although growth would fall and unemployment would rise "modestly". In May, the OECD had expected the US economy to grow by 2.5 per cent in 2008 but it cut that forecast by 0.5 percentage points. It hoped the US Federal Reserve would resist another cut in interest rates until well into 2009 when it expected the housing market to have recovered.
In the eurozone, the OECD expected growth to fall from 2.6 per cent this year to 1.9 per cent in 2008, recovering to 2 per cent in 2009.
It called on the ECB to hold its main rate. "Policy rates are assumed to remain unchanged over the next couple of years as near-term growth is expected to weaken below the potential rate and past appreciation of the euro together with fading impacts from oil and commodity prices help contain inflationary pressures.," it said.