OECD: Don't stow the life jackets yet
By Mark Atkinson
LONDON: Just over two years since it was holed below the waterline by a collision in Asia, the global economy is gradually getting back on to an even keel. By continuing to grow while other economies went into reverse or stood still, the good ship America towed the vessel clear of disaster and, now that it is moving in the right direction again, the two other flagships -- Europe and Japan -- will follow in its wake.
If not exactly plain sailing, we can look forward to a more evenly balanced period of growth over the next few years, according to the Organization for Economic Cooperation and Development (OECD).
In its twice-yearly economic outlook, published yesterday, the Paris-based think-tank said several Asian countries, particularly South Korea and Thailand, were rebounding faster than expected from the financial crisis that began in the region in 1997, and that by 3 percent this year and about 3.5 percent in 2000 and 2001.
While the United States will still be the fastest-growing region this year and next, by 2001 the EU will have overtaken America, the OECD predicts. Mercifully, it also will have enjoyed a significant drop in its unemployment rate, from an average of around 9.4 percent in 1999 to 8.3 percent by the end of 2001. In the 11 countries that make up the euro zone, the unemployment rate is forecast to shrink from 10.4 percent to 8.9 percent over the same period, meaning about two million people out of work by the end of 2001.
The OECD's rosy scenario is not, however, without its risks. Chief among them is the danger of a hard landing in the United States. While the OECD expects America to slow gradually to a more sustainable pace of growth through further touches on the monetary brakes, it notes that equity valuations are high and could be vulnerable to a sharp and disruptive correction.
The OECD also points out that the continuing deterioration of the U.S. current account, forecast to reach a record 4 percent of GDP, might yet pull the rug from under the dollar and aggravate emerging inflation pressures.
Japan still remains a potential trouble spot. The OECD acknowledges that it has been too gloomy about the world's second-biggest economy. In its last forecast, in May, it predicted Japan would shrink 0.9 percent this year and show no growth next year. Now it has penciled in forecasts for GDP growth of 1.4 percent this year and next.
However, Japan's recovery is not yet self-sustaining, being supported by a series of government spending packages, the latest of which was announced by Keizo Obuchi's government last week. It envisages spending an extra 6.5 trillion yen to build bridges, roads and schools, help finance small companies and encourage home buying.
To ensure the recovery keeps going, the government is urged by the OECD to avoid "radical changes in policy stance". That means: keep interest rates low and do not withdraw the fiscal stimulus too soon, although the OECD acknowledges that at some point Japan will have to take tough action to curb its rising level of debt, heading towards 120 percent of GDP.
The problems for Japan do not end there. While continuing to tread the narrow dividing line between fiscal largesse and healthy public finances, the government will have to keep a wary eye on the yen, which has been increasing in value since the middle of last year, putting exporters at a competitive disadvantage.
If the yen and Japan's government bond yields, forced up by the government's deteriorating fiscal position, continue to rise, "the recovery could prove to be weaker than currently expected", the OECD says.
With interest rates already near zero, Japan's options to stem the rise in the yen and bond yields are few. "Further easing of monetary policy can't be achieved by standard operations in the money market," the OECD warned. Japan's remaining option is "more aggressive intervention" in the currency and bond markets.
From outside the OECD area, the main threats to the global economic outlook come from fears of setbacks in Asia if banking and corporate restructuring falters, China -- where growth has been weakening and deflation tightening its grip -- Russia, which remains fragile after hitting devaluation last year, and Latin America, which continues to suffer from the fall-out of the global financial crisis.
On top of all that, there is also the millennium computer bug. The OECD assumes it will have no sustained impact, but warns that this could be an over-optimistic view. Any widespread malfunctioning that could not be easily repaired, inside or outside the OECD area, might hit output because of supply constraints.
-- Guardian News Service
Window: While the United States will still be the fastest-growing region this year and next, by 2001 the EU will have overtaken America, the OECD predicts.