ADVANCED ECONOMIES have survived a “near-perfect storm” in financial markets remarkably well, the Organisation for Economic Co-Operation and Development (OECD) said yesterday, predicting recoveries in the US and European economies next year without inflation taking root.
In its twice-yearly Economic Outlook, the Paris-based organisation revised down growth forecasts and lifted inflation forecasts due to more expensive energy and food, which it said would squeeze real incomes. But it said the difficulties it warned of in its last report had occurred and now it was more optimistic.
There was potential for rapid recovery among the 30 OECD member-states if financial conditions improved and they lowered the price of credit and this fed through to the real economy. “Developed economies have recorded some tremendous hits over the past 12 months,” Jørgen Elmeskov, acting OECD chief economist, told the Financial Times. “In the light of these big hits, things could have been a lot worse than they are.”
Mr Elmeskov said the odds had improved that the worst was over in financial markets. Now policymakers should be careful not to provide too much stimulus – both in setting interest rates and government budgets – for fear of inflation. “The kind of slowdown we have pencilled in is a slowdown needed to contain inflation,” he said. He attributed the success in weathering the storm to improved structural economic policies across Europe and the US and to much better macro-economic policy.
The OECD’s latest forecasts predict that the US will escape a recession, with a flat economy in 2008 being followed by an acceleration in growth throughout 2009.
Although there remains uncertainty over whether economic weakness this year will feed back into renewed tensions for banks and financial institutions, the OECD suggested that the Federal Reserve did not have to rush into any changes in its interest rate.
It expects this year’s weakness to stem inflationary pressure as unemployment rises to 6 per cent. Assuming that commodity prices remain flat, the OECD predicts such a level of unemployment will bring “uncomfortably high” inflation back down in 2009.
Similarly, predictions for the euro zone suggest the current 4 per cent interest rates should be maintained. Although the slowdown in growth forecast is more limited, because most European economies have less of a drag from falling house prices, it should be sufficient to contain inflation by the end of 2009, the OECD predicted.
It thinks the euro zone will expand by 1.4 per cent in the year to the fourth quarter, compared with only 0.3 per cent growth in the US economy.
Growth in Japan will decline, reflecting the effects of higher energy prices, but it will be sufficiently robust with year-on-year growth of 1.7 per cent in the fourth quarter of this year to maintain the upward drift in prices, which might see the end of deflation permanently in 2009, the OECD said.
The OECD, in contrast to Ben Bernanke, the Fed chairman, sees the decline of the dollar to have been beneficial. It thinks US inflationary pressures will moderate; without the dollar’s decline, “empirical estimates suggest that most of this improvement [in the US trade position] would be cyclical and unlikely to last”. – (Financial Times Service)
