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Last Updated: Tuesday, 11 May, 2004, 09:24 GMT 10:24 UK
OECD warns of unbalanced growth
By Steve Schifferes
BBC News Online economics correspondent

Steel-making workshop in China
After years of slowing growth, the rebound is taking hold
Global economic growth will pick up over the next two years as a "strong and sustainable recovery" takes hold, according to the OECD.

It forecasts that total growth amongst its 30 member countries will rise to 3.4% this year and be 3.3% in 2005.

But the think-tank warned that growth was still unbalanced, with China and the US "close to overheating" while the recovery was "bypassing" the eurozone.

The record US trade deficit and a rise in the price of oil were the big risks.

The increased demand, especially in China, is pushing up the price of all commodities and could lead to inflationary pressures, said the Organisation for Economic Cooperation and Development, an organisation of the world's richest countries.

It said it expected the central banks in China and the United States to raise interest rates to cool their economies, while it hoped that the rapid growth in world trade will lead to an export-led recovery in Continental Europe.

The main risk is that the world recovery will remain even more polarised than expected
Jean-Philippe Cotis, OECD chief economist
And it warned that failure by the US authorities to deal with the record budget and trade deficits could trigger "an abrupt back-up [increase] in long-term interest rates, with negative consequences for investment world-wide."

Europe lagging behind

Jean-Philippe Cotis, chief economist at the OECD, said that "the recovery is still, to a large extent, bypassing Continental Europe, where domestic demand and household expenditure remain surprisingly weak".

"(The main risk is that) the world recovery will remain even more polarised than expected.

"Some OECD countries could well expand too fast for lack of appropriate withdrawal of policy stimulus while others might remain mired in a 'low activity-low confidence' trap."

2004: 4.7%
2005: 3.7%
2004: 3.0%
2005: 2.8%
2004: 1.6%
2005: 2.4%
2004: 3.1%
2005: 2.7%
Total OECD
2004: 3.4%
2005: 3.3%

The OECD warned that the authorities in Europe were unable to stop their budget deficits spiralling out of control during the recession, reducing the credibility of European Central Bank and its stability and growth pact.

And it said that attempts to carry out reforms of labour markets and pension systems are still stymied in key eurozone countries like France, Germany, and Italy.

US record deficits

The OECD pointed out that both the US trade deficit and the US budget deficit are the largest on record, pointing up the unbalanced nature of world economic growth so far.

It devoted an entire chapter of its World Economic Outlook to the problem of the $500bn US trade deficit, and warned that reversing that deficit could cause serious problems for the rest of the world.

One way to cut the deficit would be for the US dollar to fall another 25%, but that would hurt non-US exporters severely, especially in the eurozone, prolonging the recession.

Other major exporters, like China and Japan, would also be affected.

Conversely, the US could reduce the deficit by dramatically slowing its own rate of growth.

But the OECD suggested that the US growth rate would have to be cut in half (from 4% to 2%) to reduce demand for imported goods enough for this to work.

Alternatively, taxes would have to be raised by 6% of GDP, or $600bn.

Both of these actions could have a severe effect on the US economic boom, ensuring a jobless recovery.

UK: taxes and rates must rise

The OECD said that the recovery is well-established in the UK, but it warned that the overheating housing market means that both interest rates and taxes will have to rise.

But its economic forecast is somewhat lower than the 3.5% growth projected by the chancellor this year and next.

And it sided with the Bank of England in its dispute with the Treasury over whether the UK is already above trend growth, warning that growth is already above potential, leading to a danger of overheating and inflation.

The OECD countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.

What is the OECD for?
30 Apr 03  |  Business
US growth solid but not sparkling
29 Apr 04  |  Business
World growth 'is gathering pace'
21 Apr 04  |  Business

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