By Katrin Bennhold
Paris, Nov. 21 (Bloomberg) -- The OECD cut its forecast for economic expansion across the world's industrialized countries and said a recovery won't occur until ``well into 2003'' as the U.S. recovery picks up steam.
The economy of the 30 members of the Organization for Economic Cooperation and Development will expand 1.5 percent this year, the Paris-based think-tank said, less than the 1.8 percent predicted in April. Next year, growth will pick up to 2.2 percent, instead of the 3 percent expected before.
The OECD said it expects a slower recovery as slumping financial markets and the prospect of a war in Iraq weigh on investor confidence and sap consumer spending. A recession is ``improbable,'' the OECD said.
``A broad-based recovery is unlikely to emerge until current uncertainties dissipate, possibly well into 2003,'' the OECD said in its Economic Outlook. Only in 2004 are economies likely to return to their potential growth rates.
The U.S. economy is being helped by lower interest rates and higher government spending, the OECD said. The world's largest economy will grow 2.3 percent this year, less than the 2.5 percent forecast in April. Buttressed by rising investment and consumer spending, the expansion will probably pick up to 2.6 percent in 2003, the OECD said.
Today's report comes a week after the European Commission lowered its forecasts for growth in the dozen nations that share the euro and the U.S., while predicting that Japan will contract less than previously forecast.
Risks
The decline in financial markets has been aggravated by corporate scandals, which began last year with the demise of U.S. energy-trader Enron Corp., the OECD said. The Dow Jones Industrial Average has shed 14 percent this year. Europe's Dow Jones Euro Stoxx 50 Index is down 28 percent.
Concern a military conflict in Iraq may disrupt oil deliveries has boosted the cost of Brent crude. The OECD expects oil prices to remain around $26 until the end of 2003, before easing back to $25 in 2004.
As a result, investment across the 30 OECD nations will shrink 4.25 percent this year, almost twice the pace of last year, the think-tank said.
The OECD said U.S. policy makers helped bolster growth. The Federal Reserve cut interest rates to a 41-year low of 1.25 percent earlier this month and U.S. government spending has made up the bulk of worldwide fiscal outlays this year.
Inflation
With inflation set to reach 1.1 percent this year and 1.3 percent next year, the Fed's policy makers should keep rates low until the middle of 2003, before raising them gradually once demand picks up.
In Europe, inflation across the 12 euro nations is expected to remain near the European Central Bank's 2 percent ceiling. The OECD expects a half point cut in borrowing costs, from the current 3.25 percent. ECB officials should ``stand ready to move further if prospects were to weaken substantially,'' the OECD said.
With European governments constrained by EU deficit rules limiting budget shortfalls to 3 percent of gross domestic product, it may be left to the ECB to boost growth, the OECD said.
The organization suggested EU deficit rules should be overhauled to take account of the ups and downs of the economic cycle.
Countries could design ``better fiscal rules or at least improve their implementation and clarify their interpretation,'' OECD Chief Economist Jean-Philippe Cotis said.
Different Speeds
Growth in Europe moves at different speeds. Germany, the continent's largest economy, faces ``significant'' risks to its recovery and will expand only 0.4 percent this year and 1.5 percent next year, the OECD predicts. With the jobless toll at a 4- year high, German shoppers have been unable to pick up the slack from falling exports.
At the other end of the spectrum, growth is holding up in the U.K., where surging house prices have insulated consumers from declining stock markets. Europe's second-largest economy, which isn't a member of the euro region, is set to grow 1.5 percent this year and 2.2 percent in 2003, the OECD said.
Growth in the 12 countries sharing the euro was revised lower, to 0.8 percent this year and 1.8 percent next year. Japan's economy is set to shrink 0.7 percent this year, before growing 0.8 percent in 2003, the OECD said.