U.S., Britain and Asia drive global recovery Katrin Bennhold/IHT IHT Wednesday, May 12, 2004 OECD sees 2-speed climb as Europe lags
PARIS The world economy is facing an uneasy two-speed recovery as the United States, Asia and Britain power ahead, leaving much of Europe behind, the Organization for Economic Cooperation and Development said on Tuesday. . While global growth is set to run at its fastest pace in nearly four years, the bullish outlook depends on policy action from economic laggards and leaders alike to avoid an incongruous mix of overheating and stagnation, said Jean-Philippe Cotis, the chief economist, for the organization, which represents the 30 largest industrialized countries. . "This is a very strong world recovery," Cotis said in an interview. But "it's important that the authorities in the different regions accompany the recovery with appropriate policies," he advised. . The correct policy response, he said, would involve an increase in U.S. interest rates Federal Reserve by the middle of the year, and a reduction of as much as half a percentage point in the euro-zone's key interest rate by the European Central Bank. . Even as oil prices surge and concern about terrorism lingers, the OECD raised the growth forecast for its member countries to 3.4 percent this year and 3.3 percent in 2005. In its last twice-yearly Economic Outlook in November, the organization had predicted expansion of no more than 3 percent for 2004. Growth was 2.2 percent in 2003. . Three years after a recession in the United States slowed the world economy, an increase in high-technology spending in America and Japan has been the driver of an OECD-wide rise in investment, which is beginning to trim unemployment lines and lift household income. Consumption, while still sluggish in continental Europe, has been buoyant in the United States, Britain and in other countries with flexible mortgage markets, where low interest rates fueled a housing boom and helped keep spending power relatively insulated, the OECD said. Meanwhile, as the specter of job outsourcing to low-cost countries is sparking debate in the United States, Europe and Japan, trade flows are on their way up. . Policy makers in all regions have their work cut out for them, Cotis said. America, racing ahead at well above its trend growth, needs higher interest rates to stifle nascent inflationary pressure; Japan needs still easier credit to leave behind the lingering threat of deflation; and the 12 euro-zone nations need a complete makeover including a rate cut, more flexible labor markets and a coordinated policy on research and development to enhance their competitiveness. . In addition, Cotis said, all three regions must work to reduce their growing budget deficits to prepare for decades of slowing population growth and exploding health and pension costs. . America has been the main force behind the worldwide pickup in growth, buoyed by the lowest interest rates in 46 years and by $1.7 trillion in tax cuts. . Expansion in the world's largest economy is on track to reach 4.7 percent this year, which would be the fastest rate in two decades and much higher than trend growth at about 3.3 percent, the OECD estimates. . Clouding this picture are the record-high U.S. budget deficit and the risk that a low benchmark Fed interest rate, at 1 percent since June, would stoke inflationary pressures and create a bubble in financial markets. . "We are advocating monetary tightening sooner rather than later," Cotis said. . The OECD stressed in its report that the Federal Reserve, whose policy makers next meet on June 29, had maintained an "extremely accommodative stance for an unusually long time." But its benchmark - the federal funds rate on overnight loans between banks - would need to rise over time to 4 percent from its present level of 1 percent to return to a neutral level. . Six months ahead of national elections, President George W. Bush may be reluctant to trim fiscal stimulus by reducing government spending. That leaves the burden squarely on the shoulders of Fed chairman, Alan Greenspan, and his rate-setting team. . If the United States has had to get global growth off the ground by itself in past recoveries, this time it had a helping hand from Asia. Both a booming Chinese economy and an unexpectedly strong recovery in Japan have helped bolster global demand in recent months, Cotis said. . China, which is expected to grow at 8.3 percent this year, accounted alone for about a quarter of the growth in world trade last year, the OECD report said, predicting that trade would grow 8.6 percent this year and 10 percent in 2005. And neighboring Japan appears to have emerged from a decade-long slump. The OECD raised its forecast for Japan, the world's second-largest economy, to 3 percent this year from the 1.8 percent it had expected earlier. . Meanwhile, continental Europe continues to lag the world. The OECD cut November's already meager growth forecast for the euro zone this year to 1.6 percent from 1.8 percent. . "The weak spot is the euro area, especially Germany and Italy," Cotis said. . In Germany, rigid hiring and firing rules have kept unemployment stubbornly high, sapping consumer confidence and prompting people to save rather than spend. Even as business confidence is perking up and companies are seeing foreign orders rise, consumer spending, worth more than half of the country's gross domestic product, has not increased since the first quarter of last year. . In Italy, the situation is almost the opposite: While consumption has remained comparatively robust, exports have suffered from a chronic lack of cost competitiveness, as ballooning public spending pushed up inflation. . Europe needs to ease labor market restrictions to trim unemployment and bolster demand, Cotis said. Governments need to consolidate public accounts, he said, predicting that the euro zone's three largest member states will all exceed the budgetary limit prescribed by the EU's stability and growth pact this year and next. Unlike the United States, he added, the region could also do with lower interest rates. . The European Central Bank has kept its benchmark refinancing rate at 2 percent since June of last year, twice the Fed's level. That difference has helped boost the euro, which rose 26 percent against the dollar over the past two years, making eurozone exports more expensive overseas. . Even as oil prices creep higher, threatening to boost inflation, Cotis said that "there is an absolute case for not tightening and probably still a case for loosening." . Not everything is in the hand of policy makers. A further "significant" increase in oil prices, triggered by more unrest in the Middle East or potential terrorist attacks, would be a risk for worldwide growth, the OECD's report said. A sustained increase of $5 in the price would shave about 0.2 percentage point off OECD-wide growth, Cotis said. . International Herald Tribune
See more of the world that matters - click here for home delivery of the International Herald Tribune. < < Back to Start of Article OECD sees 2-speed climb as Europe lags
PARIS The world economy is facing an uneasy two-speed recovery as the United States, Asia and Britain power ahead, leaving much of Europe behind, the Organization for Economic Cooperation and Development said on Tuesday. . While global growth is set to run at its fastest pace in nearly four years, the bullish outlook depends on policy action from economic laggards and leaders alike to avoid an incongruous mix of overheating and stagnation, said Jean-Philippe Cotis, the chief economist, for the organization, which represents the 30 largest industrialized countries. . "This is a very strong world recovery," Cotis said in an interview. But "it's important that the authorities in the different regions accompany the recovery with appropriate policies," he advised. . The correct policy response, he said, would involve an increase in U.S. interest rates Federal Reserve by the middle of the year, and a reduction of as much as half a percentage point in the euro-zone's key interest rate by the European Central Bank. . Even as oil prices surge and concern about terrorism lingers, the OECD raised the growth forecast for its member countries to 3.4 percent this year and 3.3 percent in 2005. In its last twice-yearly Economic Outlook in November, the organization had predicted expansion of no more than 3 percent for 2004. Growth was 2.2 percent in 2003. . Three years after a recession in the United States slowed the world economy, an increase in high-technology spending in America and Japan has been the driver of an OECD-wide rise in investment, which is beginning to trim unemployment lines and lift household income. Consumption, while still sluggish in continental Europe, has been buoyant in the United States, Britain and in other countries with flexible mortgage markets, where low interest rates fueled a housing boom and helped keep spending power relatively insulated, the OECD said. Meanwhile, as the specter of job outsourcing to low-cost countries is sparking debate in the United States, Europe and Japan, trade flows are on their way up. . Policy makers in all regions have their work cut out for them, Cotis said. America, racing ahead at well above its trend growth, needs higher interest rates to stifle nascent inflationary pressure; Japan needs still easier credit to leave behind the lingering threat of deflation; and the 12 euro-zone nations need a complete makeover including a rate cut, more flexible labor markets and a coordinated policy on research and development to enhance their competitiveness. . In addition, Cotis said, all three regions must work to reduce their growing budget deficits to prepare for decades of slowing population growth and exploding health and pension costs. . America has been the main force behind the worldwide pickup in growth, buoyed by the lowest interest rates in 46 years and by $1.7 trillion in tax cuts. . Expansion in the world's largest economy is on track to reach 4.7 percent this year, which would be the fastest rate in two decades and much higher than trend growth at about 3.3 percent, the OECD estimates. . Clouding this picture are the record-high U.S. budget deficit and the risk that a low benchmark Fed interest rate, at 1 percent since June, would stoke inflationary pressures and create a bubble in financial markets. . "We are advocating monetary tightening sooner rather than later," Cotis said. . The OECD stressed in its report that the Federal Reserve, whose policy makers next meet on June 29, had maintained an "extremely accommodative stance for an unusually long time." But its benchmark - the federal funds rate on overnight loans between banks - would need to rise over time to 4 percent from its present level of 1 percent to return to a neutral level. . Six months ahead of national elections, President George W. Bush may be reluctant to trim fiscal stimulus by reducing government spending. That leaves the burden squarely on the shoulders of Fed chairman, Alan Greenspan, and his rate-setting team. . If the United States has had to get global growth off the ground by itself in past recoveries, this time it had a helping hand from Asia. Both a booming Chinese economy and an unexpectedly strong recovery in Japan have helped bolster global demand in recent months, Cotis said. . China, which is expected to grow at 8.3 percent this year, accounted alone for about a quarter of the growth in world trade last year, the OECD report said, predicting that trade would grow 8.6 percent this year and 10 percent in 2005. And neighboring Japan appears to have emerged from a decade-long slump. The OECD raised its forecast for Japan, the world's second-largest economy, to 3 percent this year from the 1.8 percent it had expected earlier. . Meanwhile, continental Europe continues to lag the world. The OECD cut November's already meager growth forecast for the euro zone this year to 1.6 percent from 1.8 percent. . "The weak spot is the euro area, especially Germany and Italy," Cotis said. . In Germany, rigid hiring and firing rules have kept unemployment stubbornly high, sapping consumer confidence and prompting people to save rather than spend. Even as business confidence is perking up and companies are seeing foreign orders rise, consumer spending, worth more than half of the country's gross domestic product, has not increased since the first quarter of last year. . In Italy, the situation is almost the opposite: While consumption has remained comparatively robust, exports have suffered from a chronic lack of cost competitiveness, as ballooning public spending pushed up inflation. . Europe needs to ease labor market restrictions to trim unemployment and bolster demand, Cotis said. Governments need to consolidate public accounts, he said, predicting that the euro zone's three largest member states will all exceed the budgetary limit prescribed by the EU's stability and growth pact this year and next. Unlike the United States, he added, the region could also do with lower interest rates. . The European Central Bank has kept its benchmark refinancing rate at 2 percent since June of last year, twice the Fed's level. That difference has helped boost the euro, which rose 26 percent against the dollar over the past two years, making eurozone exports more expensive overseas. . Even as oil prices creep higher, threatening to boost inflation, Cotis said that "there is an absolute case for not tightening and probably still a case for loosening." . Not everything is in the hand of policy makers. A further "significant" increase in oil prices, triggered by more unrest in the Middle East or potential terrorist attacks, would be a risk for worldwide growth, the OECD's report said. A sustained increase of $5 in the price would shave about 0.2 percentage point off OECD-wide growth, Cotis said. .
