The Hindu Business Line : OECD report sees halt in recovery

THE Organisation for Economic Cooperation & Development (OECD) has said that hopes had been dashed about recovery in the gross domestic product (GDP) growth in the US with real GDP growth in OECD area forecast to be around 2.9 per cent in 2005 and 3.1 per cent in 2006 from this year's 3.6 per cent.

In its bi-annual world economic outlook, which was released in Paris, the intergovernmental think tank of 30 rich industrial countries said since the 2001 slowdown, the world economy has moved in fits and starts and compared to cautiously upbeat assessments that could be made even two months ago, the turnaround for the worse by abrupt gyrations in oil prices has been "a source of disappointment".

Though a surge in oil prices has depressed real incomes as well as confidence in the OECD countries, there are nonetheless good reasons to believe that the global economy would regain momentum in a not-too-distant future as GDP growth in euro area is set to improve from 1.8 per cent in 2004, 1.9 per cent in 2005 to 2.5 per cent in 2006.

Bolstered by strong balance sheets and high profits, the recovery of business investment should continue in North America and start in earnest in Europe, while consumer spending would benefit from the retreat of oil prices to less onerous levels, in a context where job creation is progressively strengthening and monetary conditions remain very accommodative.

From a geographical perspective, the momentum of this recovery would benefit from continued Asian dynamism, in China, where activity accelerated in the third quarter, following a desirable slowdown during the first half of the year and Japan, which has staged a spectacular comeback based on a renewed export drive, broadening into a recovery of investment, employment and finally consumption.

OECD said a strong appreciation of the euro, in a context of worsening external imbalances or further rise in oil prices might bear disproportionately on Continental Europe, where growth is still over-reliant on exports and high oil prices do not find their counterpart in high output growth and energy demand.

Devoting a special chapter of its outlook to the economics of oil, OECD said that its expertise suggests that recent oil prices were certainly well above long-term equilibrium levels, even allowing for strong market power on the part of the OPEC cartel. Future oil prices would crucially depend on further progress in energy conservation in emerging economies as well as the US, it said.

Stating that prudent management of non-renewable natural resources is not the only issue that matters for the long-run sustainability of OECD societies, the report said putting public finances in order is also of vital importance for the well being of future generations. Given existing budgetary plans, most of the largest OECD countries would see no substantial progress in bringing down structural deficits which is regrettable in a context where pension and healthcare reforms are generating painful debate, the report cautioned.