OECD doubles growth forecast for 2010; Asia to power recovery

OECD doubles growth forecast for 2010; Asia to power recovery
The Financial Express, November 20, 2009, Page 18

Bloomberg

The Organisation for Economic Cooperation and Development (OECD) doubled its growth forecast for the leading developed economies next year and predicted a further acceleration in 2011 as China and other emerging countries power a global recovery.

The combined economy of the group’s 30 member countries will expand 1.9% next year and 2.5% in 2011, the Paris-based organisation said in a report on Thursday. Output will contract 3.5% this year. The OECD, which advises members on economic policy, forecast 2010 growth of 0.7% in June.

The MSCI World Index has surged 69% in the past eight months as the world economy emerges from its worst recession in more than half a century. While the US and the euro region will return to growth next year, mounting debt burdens will keep the expansion in check, the OECD said.

“We now have numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, said. “It’s still a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors.”

The MSCI index, down 0.6% on Thursday, was little changed after the OECD report was published. The yield on the benchmark German 10-year government bond stayed at 3.292%.

Output in the OECD economies will only return to the level achieved in the first three months of 2008 in the third quarter of 2011, underlining the damage done by the banking crisis.

The US economy will grow 2.5% in 2010 instead of the 0.9% predicted in June and the euro region will advance 0.9% instead of a projection it would stagnate, the OECD said. Japan will post growth of 1.8% instead of 0.7%. The forecast for China was raised to 10.2%.

“Outside of the OECD, things are more buoyant, especially in Asia,” Elmeskov said. “The non-OECD countries weren’t affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies.”

The OECD gave 2011 growth forecasts for the first time. The US will grow 2.8%, the euro area 1.7% and Japan 2%. The Chinese economy will expand 9.3%, it said.

The relative weakness of the US and euro region’s recoveries is prompting policy makers to put China under pressure to allow the yuan to appreciate more. President Barack Obama told Chinese leaders this week the US expects to see progress by next year on making the exchange rate “more flexible,” Ambassador Jon Huntsman said.

Sluggish growth in the OECD means most of their central banks should be careful in tightening monetary policy as their economies recover, the organisation said. Unemployment in the OECD region will increase by 21 million by the end of 2010 from 2007, taking the rate to 9% from 5.6%.

While non-conventional measures may need to be withdrawn in the months ahead to counter a “large overhang of liquidity,” interest rates shouldn’t start to move up until inflationary pressures begin to be felt, the report said. “The recovery is weak and there is a lot of spare capacity,” Elmeskov said.

The OECD’s forecasts assume the US Federal Reserve and the European Central Bank hold off on rate increases until almost the end of 2010 and the Bank of Japan maintains its benchmark rate at 0.1% through 2011, he added.

The ECB’s main rate, currently at 1%, will probably climb to 2% by the end of 2011 and the Fed’s benchmark will rise to 2.25% in that time from close to zero at present. While unprecedented liquidity injections have raised concern about new asset bubbles that policy makers need to be aware of, they have yet to materialise, the OECD says.

“We are talking about a risk here, not something that is happening,” Elmeskov said. “One can say that given where we are there’s little alternative to very low rates but we need to be aware that they could imply the risk of bubbles forming.”