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World economy switches engines as US shudders: OECD

Reuters | November 28, 2006
Brian Love

The U.S. economy is running out of steam but Europe's resurgence and Asia's awakening will prevent the world's economy from derailing as it did after the stock market crash of 2000, the OECD said in a report on Tuesday.

"Rather than a major slowdown, what the world economy may be facing is a rebalancing of growth across OECD regions," said Jean-Philippe Cotis, chief economist at the Organization for Economic Cooperation and Development.

In a twice-yearly Economic Outlook, the OECD forecast growth decelerating next year to 2.5 percent across its 30 mainly rich, industrialized member countries from 3.2 percent this year, and regaining some speed in 2008.

China, India and other fast-growing emerging economies such as Russia would keep going healthily and Europe's comeback this year contributed toward a "rebalancing" of global demand and output which mitigated the impact of a U.S. slowdown that would have spelled trouble for all in decades past.

The OECD cut its forecast growth in a U.S. economy hit by a housing market slump, to 3.3 percent for this year from the 3.6 percent predicted previously, and predicted expansions of 2.4 and 2.7 percent for 2007 and 2008 respectively.

Cotis said the slowdown expected at OECD level was nothing like the one that hit in 2000 when most economies outside of Japan were overheating and stock market valuations had hit never-seen heights.

"Is history repeating itself? In principle, no. What we see is a slowdown, not a recession," he said.

"We're getting the rebalancing we've been awaiting for so long, and it's happening gradually rather than abruptly."

The OECD raised its predictions for euro zone growth to 2.6 percent for this year followed by 2.2 and 2.3 in the following two years, closer to what is considered its natural potential, not exceptional but way better than 2005's 1.5 percent.

It said it believed the European Central Bank would continue to raise interest rates since the economy no longer needed such stimulation, with rates peaking at 4 percent in early 2008, twice the level of late 2005 when the ECB started raising.

Despite saying inflation posed more of a risk in the United States than in years past, the OECD said it expected the U.S. Federal Reserve to keep official interest rates on hold there next year, and cut in 2008 as inflation pressures receded.

The OECD expects the U.S. economy to pick up a bit after a lull that may last only the first few months of next year.

It advised Japan to hold off on rate rises until it was far clearer that deflation, a scourge for many years, was indeed as dead as the authorities would like to believe, noting that wages were, worryingly, dead flat.

It predicted 2.8 percent growth this year followed by two years of 2 percent expansion, so far driven largely by exports than domestic demand.

China continued to be the driving force of Asian expansion with growth rates of 10-11 percent in recent quarters and India too was growing briskly despite a hit from high oil prices and slightly tighter monetary policy in 2006.


While the downturn in the U.S. housing market marked the end of a decade-long boom that also occurred across much of the rest of the world, the OECD said the impact was marked in the United States because of a more direct link between home financing and wider consumption patterns.

"It is comforting to note that in many countries households seem well prepared to cope with the consequences of a downturn in housing markets ... household balance sheets are generally sound and debt-servicing burdens still moderate, although some low-income households may be overstretched."

House prices have more than doubled across the OECD in the past decade. Updated OECD figures showed the rises in the first half of 2006 were most notable in Denmark, Sweden, Ireland and France, with Danish prices up 22 percent compared to the same period of 2005, France up 10.9 and U.S. prices up 7.3 percent.


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