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Danger ahead for the world economy:
OECD
The
global economy is facing big risks in the form of
high oil prices and an unsustainable American
trade deficit, a new study has warned. The
Paris-based Organization for Economic Cooperation
and Development (OECD), in its latest report on
the world economy, has said it could no longer
ignore the rising pressures facing the globe.
The OECD has predicted that growth in its
30 industrialized member nations would slip to
2.6% in 2005, after 3.4% in 2004, before edging up
slightly to 2.8% next year. The OECD's members
include European industrialized nations along with
the United States, Japan, and South Korea.
Weak demand in Europe, it said, and oil
prices around US$48 a barrel, were already causing
problems for the global economy. Painting a grim
picture for the European economy, the OECD said
the European Central Bank must consider cutting
borrowing costs even from the current low of 2% to
stimulate growth. The OECD has cut its growth
forecast for the euro region to 1.2% for this year
from a forecast of 1.9% in December.
But
Europe's stagnation may be exacerbated if the
United States fails to control its trade deficit,
which would result in a depreciation of the
American dollar. "Given the unsustainable US
current account position, endogenous pressures for
correcting existing imbalances will become ever
larger. At some point, they may take the form of
an abrupt weakening of the dollar with adverse
consequences for the OECD area as a whole," it
warned. "More concretely, a falling dollar would
not only curtail net exports but also domestic
demand in Japan and Europe where resilience is low
and monetary and fiscal room for maneuver is
limited. Although not the most likely outcome at
present, such an unpleasant scenario is gradually
looming larger," the report said. "Cooperative
adjustment" to the value of some Asian currencies
would help reduce the danger of any sudden drop in
dollar value, the report said.
Growth in
the US has been forecast at 3.3% in 2006, down
from 3.6% this year and 4.4% in 2004. The warning
on the US trade deficit is the most strident yet
from the OECD. Economists are particularly
concerned about the OECD's prediction that the
deficit will reach 6.7% of the US gross domestic
product (GDP) by next year, or nearly $900
billion.
The OECD's chief economist,
Jean-Philippe Cotis, said any economic recovery
across the globe's developed nations was patchy at
best. "The smooth scenario where the recovery was
expected to spread more evenly across the OECD has
not materialized," he said. As a result, the OECD
has trimmed its forecast for world GDP growth to
2.6% in 2005 from the previous forecast of 2.9%.
As for the US, the OECD said growth is
expected to slow there because of growing labor
costs and capacity constraints starting to be felt
in specific industries. It also implicitly
criticized the Bush administration's determination
to push on with tax cuts in its current budget,
which will further push up the country's budget
deficit.
In a positive sign for all
developed countries, the OECD said the threat
posed by inflation is ebbing away as low-cost
manufacturing nations such as China and India
flood the world with cheap imports. But this means
that cost pressures will have to be borne by
companies, since they will be unable to pass on
higher prices because of tough competition from
Chinese and Indian firms.
"Inflation will
continue to be damped, like in other OECD
countries, by the ongoing offshoring trend, and
more generally by the integration of China, India
and other emerging markets into the world
economy," it said. "Much of the cost pressure is
expected to be absorbed by profit margins, leaving
core inflation still fairly subdued."
According to the OECD, China's rapid
economic expansion will continue to drive Asia's
growth burst. The multilateral agency expects
China's economy to expand at 9% this year and
accelerate to 9.2% the next. For the other major
Asian economy, Japan, it has lowered its forecast
for growth to 1.5% from the 2.1% forecast in
December.
(Asia
Pulse) |
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