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Thursday, 25 April, 2002, 09:39 GMT 10:39 UK
World growth set for recovery
Shoppers in Osaka
Consumers around the world are the key to recovery
The world is set for a strong economic recovery next year, according to a leading international organisation.

The OECD, which represents the world's 30 richest countries, says that "confidence has returned more rapidly than expected" to the world's economies, especially in the United States, despite the 11 September terrorist attacks.

Growth in major economies
US
2002: 2.5%
2003: 3.5%
Eurozone
2002: 1.3%
2003: 2.9%
Japan
2002: -0.7%
2003: 0.3%
UK
2002: 1.9%
2003: 2.8%
source: OECD
And it expects "growth momentum" to return, with overall economic growth among rich countries rising from 1.8% this year to 3% in 2003.

But the recovery will be strongest in the United States, where growth could reach 3.5% next year, weaker in Europe and especially weak in Japan, whose economy is still declining.

And it warns that rising oil prices, or a sharp rise in interest rates while consumers still have large debts, could still derail the recovery.

Risks remain

The OECD warns that there are still risks for policymakers, even in the United States, where the sharp cuts in interest rates and increases in government spending helped make the recession short-lived.

The "timing and speed" of the withdrawal of these stimulants to growth remain crucial. Interest rates should only be raised gradually, while the Federal budget should return to surplus to ensure "a more balanced distribution of risks."

And it projects that the US will have an even bigger trade deficit in 2003, which could put pressure on the dollar and lead to foreigners withdrawing investment in the US, especially if the stock market continues to fall.

And it warned that the growing trade gap could exacerbate protectionist pressures, as evidenced by the current trade war over steel imports.

UK warned

The UK - which had the best growth rate among all major industrial countries in 2001 - is expected to benefit from the recovery, aided by "resilient household confidence and an expansion of public spending."

But the OECD says the UK will grow by only 1.9% this year, and 2.8% next year, below the Chancellor's forecast of 2-2.5% this year and 3-3.5% next year.

It also expects unemployment to rise slightly, and the Bank of England to begin raising interest rates soon - by the spring of 2002.

According to the OECD, the main risk for the UK economy is that higher interest rates could undermine consumer confidence and house prices, although that could help "unwind" the imbalance between the consumer and manufacturing sector, especially the pound sterling weakened on foreign exchange markets.

Eurozone weak

The OECD warned that there were "as yet few signs of a bottoming-out" of the downturn in Europe, and warned the European Central Bank not to raise interest rates "until the recovery has become more firmly established."

It also said that more progress was needed in structural reforms, such as more competition in financial and product markets, and changes to the labour markets to reduce the tax burden on the low-skilled.

It projects unemployment to remain above 8%, while inflationary pressures will remain moderate despite the recovery.

Japan in recession

The big exception to the recovery is Japan, where the economy is expected to shrink for the second year in a row during 2002, declining by 0.7%, before recovering to a very weak 0.3% growth rate in 2003.

The OECD says that although exports are recovering with the weaker yen, growth remains "very anaemic" due to the reluctance of households to spend money. As consumers fear rising unemployment and inadequate state pension provision,

Deflation, or falling prices, seems to "have become entrenched", further reducing demand, while the ills of the banking sector mean that extra money pumped into the system by the Bank of Japan have not led to increased lending and spending.

Developing countries gain

The OECD says that developing countries will also benefit from the world recovery, but that the recovery in the "dynamic Asian economies" like Singapore, Malaysia and Taiwan could be slower than expected, due to weaknesses in the banking system and increased competition from China.

But China's growth rate is slowing, and becoming more dependent on domestic demand, rather than exports.

In South America, Brazil has avoided any financial contagion from the Argentine crisis, and looks set for a strong recovery in 2003.

See also:

24 Apr 02 | Business
European economy turns the corner
24 Apr 02 | Business
Doubts grow over pace of US revival
24 Apr 02 | Business
Brown defends Budget's prudence
18 Apr 02 | Business
IMF upbeat on world economy
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