OECD foresees US-led world recovery

By SHIHOKO GOTO, UPI Senior Business Correspondent  |  April 25, 2002 at 2:56 PM
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WASHINGTON, April 25 (UPI) -- The agency representing the world's richest nations reported Thursday that economic growth among their member countries will expand considerably more in 2002 than it did the previous year.

The Organization of Economic Cooperation and Development said its 30 member countries collectively should post a gross domestic product growth rate of 1.9 percent this year, compared to 0.7 percent in 2001. The agency projects GDP in 2003 to expand still further to 2.9 percent.

"Recovery will spread from the United States, boosting exports from Europe ... and limit contraction in Japan," said Val Koromzay, OECD director of economics, in his briefing to reporters.

The agency anticipates U.S. GDP expanding to 2.5 percent in 2002, and reaching 3.5 percent in 2003. It sees the European Union's GDP rising to 1.5 percent this year, going up to 2.8 percent the following year. Japan's economy is also expected to pick up in 2003 albeit slightly, to 0.3 percent, after contracting 0.7 percent this year.

OECD projections for the world economy are largely in line with that of other international agencies, including the International Monetary Fund, which released its semi-annual world economic outlook report earlier this month.

But though the international community is far more upbeat about global prospects than they were six months ago, agencies such as the OECD continue to warn of downside risks, especially with the U.S. economy's recovery still being relatively weak.

For one, Koromzay warned that the boom in U.S. consumer spending over the past few months wasn't sustainable.

"A lot of the spending activity was borrowed from the future, and we need to see an increase in capital investments to ensure sustainable growth," he said.

He pointed out that consumers took advantage of low-price deals immediately after the terrorist attacks, such as zero-interest financing for cars and historically low mortgage rates.

Precisely because consumers rushed to take advantage of such special deals at the end of last year and the beginning of 2002, they are unlikely to buy as much later on this year.

"We therefore expect a less dynamic recovery in the second half of the year," Koromzay said.

Other downside risks cited by the economist were a further devaluation in the stock market, another possible terrorist attack, and a hard hit on trade due to increased protectionism.

But some private sector analysts are also increasingly worried about the still-buoyant housing market, which had escaped the economic doldrums of the past year unscathed, as well as the potential rise in interest rates.

As the U.S. economy picks up steadily, the question among all economists is when the Federal Reserve will tighten monetary policy once again, rather than if. But interest rate increases are likely to have wide repercussions across the board for the still fledgling recovery. Particularly vulnerable is the housing market.

The OECD anticipates that the Fed could start increasing the key federal funds target rate, currently standing at 1.75 percent, as early as next month. Moreover, the agency projects the rate to be at 4 percent by the second half of 2003.

Such monetary tightening, however, is likely to hurt the booming housing market.

"The mortgage refinancing boom will end once rates go back up to 3 percent," said Zurich Financial Services' chief global economist David Hale. He added should the refinancing rate halve, it would cut GDP by 2 to 3 percentage points.

The OECD's Koromzay also agreed that while the real estate market was "not a huge problem yet," the inevitable monetary tightening and subsequent higher mortgage rates would spell a drop in the hitherto robust housing prices.

Others, however, counter-argued that while the housing market was slightly overheated at the moment, it was not over-valued as much as the stock market, and thus would not drop as much even if the cost of financing new homes went up as a result of a rate increase.

"There has been no housing bubble, and it's strictly been within the natural relation of supply and demand," said David Malpass, chief global economist at Bear Stearns.

"Prices could stop going up but there will be no major correction in housing prices like the Nasdaq (stock market), only a slight weakening in the market," he added.

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