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Last Updated: Tuesday, 6 September 2005, 19:57 GMT 20:57 UK
Oil shock threatens world growth
Petrol station price board
High petrol prices will not go away, says the OECD
High world oil prices are here to stay and price shocks pose threats to key economies, says the Organisation for Economic Co-operation and Development.

The UK and Germany's prospects for 2005 are less favourable as a result, the OECD said in its latest interim report.

But even after Hurricane Katrina's impact, the US economy should expand fast, the economics think-tank said.

Its UK growth forecast is down from 2.4% to 1.9%, but US growth is still predicted to reach 3.6% this year.

Germany's growth outlook has weakened from 1.2% to 1% since the Paris-based OECD last published its forecasts in May.

This was largely because of the soaring cost of oil, which has risen by about $20 a barrel since then, the OECD said.

Its chief economist, Jean-Philippe Cotis, told a news conference that the price of oil was not far from the level reached at the end of the 1970s.

"There is a major shock, and there is no evidence it has reached its conclusion," he said.

On Tuesday, US light sweet crude oil prices dipped by $1.61 a barrel to $65.96, while London Brent crude was off 18 cents to $64.67 a barrel.

Coping with adversity

However, not all the countries covered by the latest OECD report have had their economic growth figures revised downwards.

Italy's economy, which had been predicted to shrink, is now expected to grow slightly, while France and Japan are also now seen as likely to enjoy higher growth.

OECD 2005 GROWTH FORECAST
UK: Down from 2.4% to 1.9%
US: Unchanged at 3.6%
Germany: Down from 1.2% to 1.0%
Japan: Up from 1.5% to 1.8%
France: Up from 1.4% to 1.6%
Italy: Up from -0.6% to 0.2%
Euro area: Up from 1.2% to 1.3%
G6: Up from 2.4% to 2.5%

The OECD said the cause of the disparity was the fact that different countries are at different stages of their business cycle.

The US, benefiting from broad-based expansion and stable inflation, is better placed to cope with adversity than the UK, where household consumption has faltered of late and core inflation is rising, it said.

Japan's economy had also been experiencing strong momentum before the latest shocks, with the labour market "healing" and the recovery taking hold, the report added.

However, it was hard to assess the effect of Hurricane Katrina at this stage and US growth might be "somewhat more subdued" in the second half of 2005, it said.

Mr Cotis said the US Federal Reserve should continue to raise interest rates, "although possibly at a more mesaured pace than hitherto".

On the other hand, the European Central Bank had "no urgent need" to tighten rates and should maintain "a very accommodative stance", he added.


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