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Think tank sees strong U.S. growth

The world's richest economies are set to grow at their fastest rate in four years in 2004 and, while inflation will stay low, interest rates should start to return to more normal levels, the Organization for Economic Cooperation and Development said on Tuesday.
/ Source: Reuters

The world's richest economies are set to grow at their fastest rate in four years in 2004 and, while inflation will stay low, interest rates should start to return to more normal levels, the Organization for Economic Cooperation and Development said on Tuesday.

In its semi-annual Economic Outlook for the 30-nation OECD area, the Paris-based think tank said global recovery was now "strong and sustainable" -- trumpeting a rebound in investment spending and information technology spending in particular.

But it said now was the time to readjust historically loose monetary policy in the fastest growing countries.

"Where the recovery is more advanced, timely monetary tightening should help contain mild inflationary pressures," OECD Chief Economist Jean-Phillipe Cotis said in the foreword to the report.

But the OECD said conditions were very different from region to region. It urged the U.S. Federal Reserve to start pushing its interest rates up as soon as this summer but advocated another half-point cut in the European Central Bank's key rates.

This divergence was indicative of the report's big concern.

The OECD raised a warning flag about the significantly differing speeds of growth and, in particular, the lagging performance of continental European economies.

This, it said, could hamper an unwinding of large and potentially destabilizing imbalances in the national accounts of the United States and elsewhere and risk abrupt financial market adjustments to compensate -- such as a sharp fall in the dollar.

"Although this Economic Outlook depicts a relatively smooth scenario, a number of risks surrounds the latter," Cotis said. "Chief amongst them is the risk of the world remaining even more polarized than expected."

Cotis said that while some regions of the world could well experience some overheating, due to very easy credit conditions and ongoing tax cuts or government spending, some other areas may remain in a "low-activity-low confidence trap".

"Such cumulative divergences would in turn worsen current account imbalances and financial uncertainties," he added.

The report forecast real gross domestic product growth in the OECD-wide area of 3.4 percent this year, up from 2.2 percent in 2003 and its highest level since the 3.9 percent recorded in 2000. The 2004 forecast was up from the 3.0 percent rate it expected last November.

The multi-speed expansion is illustrated by an expected 4.7 percent growth rate in the United States this year and a 1.6 percent rate in the euro area.

While this gap is expected to narrow in 2005, the OECD still expects it to be well in excess of one percentage point.

It said that, despite the robust overall growth outlook, inflation across the area was expected to ease further to its lowest levels in over three decades.

Measured by the so-called "GDP deflator", the OECD said inflation would fall to 1.7 percent this year and 1.6 percent in 2005 -- almost half the 2.9 percent rate from 2000.

While this masks rising inflation pressures in the U.S., it reflects continued disinflation in Europe and persistent -- if easier -- deflationary conditions in Japan.

"Despite recent increases in oil and commodity prices, inflationary pressures should remain relatively subdued over the next few quarters against the background of the substantial economic slack that remains in many OECD regions," said Cotis.

The OECD forecast the area-wide "output gap", a measure of the difference between actual growth and the potential growth rate above which economies generate inflation, at minus 0.9 percent in 2004, narrowing to minus 0.3 percent next year.

This masks a huge amount of economic slack in the euro zone economies, it said.

The OECD estimates the euro zone "output gap" will expand to minus 2.3 percent in 2004 from minus 2.0 percent last year. This compares with an expected gap of minus 0.3 percent in the U.S. this year and a positive gap of 0.2 percent there in 2005.

Elsewhere in the report, the OECD said there was no room for governments to use fiscal policy as an additional stimulus to their economies. Countries where the recovery was most advanced should start reining in underlying budget shortfalls now, it said.

"There is an urgent need for governments to regain control over spending trends and to put them back on a more sustainable course," the report said. "As the recovery firms, the pace of fiscal retrenchment should be stepped up."

Unemployment, meantime, is starting to fall across the area and job creation, even though slow to take hold in the United States during the early part of the recovery, is clearly picking up. The OECD forecast unemployment across the area to fall to 6.9 percent this year and 6.7 percent in 2005, compared with a peak for the recent cycle of 7.1 percent last year.

The think tank downplayed recent concerns that more and more western white-collar office jobs were moving to low-cost countries, such as India and China.

"Although it brings pain and at times social dislocation in some parts of the economy, offshoring remains of smallish dimension in comparison with the global job turnover of the U.S. economy," Cotis said. "Appropriate public policies can do a lot to ease the burden of those who lose work through rapid economic change."