The world's richest economies are set to grow at their fastest rate in four years in 2004 and, while inflation will stay low, U.S. interest rates at least should start to rise this summer, the OECD said on Tuesday. In its semi-annual Economic Outlook, the Organisation for Economic Cooperation and Development said the global recovery was now "strong and sustainable" -- trumpeting a rebound in investment spending, especially information technology spending. But the Paris-based think tank said now was the time to change historically loose monetary policy in the fastest growing countries, particularly the United States, where there was little prospect of a tightening of fiscal policy. "For the U.S., the main risk is that macroeconomic policies remain too expansionary too long during the upswing," OECD chief economist Jean-Philippe Cotis told in an interview. "The general message we have is basically withdrawals (of stimulus) should be started sooner rather than later," he said.
Asked whether June would be a reasonable time for the Federal Reserve to start raising interest rates, Cotis said: "Yes, sure." The Federal Reserve has held the federal funds rate at 1.0 percent, its lowest since 1958, since last June. The next Fed policy meeting is a two-day affair on June 29 and 30. Any U.S. rate rise would be the first since May 2000. Cotis said rate rises should be measured: "Incremental is the best option, but it could depend obviously on circumstances."
A MULTI-SPEED WORLD
The OECD raised a warning flag about the significantly differing speeds of growth and, in particular, the lagging performance of continental European economies. This, it said, could hamper an unwinding of large and potentially destabilising imbalances in the national accounts of the United States and elsewhere, and risk abrupt financial market adjustments to compensate -- such as a sharp fall in the dollar. "Although this Economic Outlook depicts a relatively smooth scenario, a number of risks surrounds the latter," Cotis said in the report. "Chief amongst them is the risk of the world remaining even more polarised than expected." The report forecast real gross domestic product growth in the 30-nation OECD-wide area of 3.4 percent this year, up from 2.2 percent in 2003 and its highest level since the 3.9 percent recorded in 2000. The 2004 forecast was up from the 3.0 percent rate it expected last November. The multi-speed expansion is illustrated by an expected 4.7 percent growth rate in the United States this year and a 1.6 percent rate in the euro area. Cotis said a cut in euro zone interest rates could help underpin the recovery in the 12-nation currency zone. "Basically price stability is really there," he told . "It may be useful to cut ... We see it more as an insurance policy." The European Central Bank left interest rates steady at 2.00 percent for the 11th straight month last Thursday.
NO OIL PRICE WORRIES
The OECD said that, despite the robust overall growth outlook, inflation across the area was expected to ease further to its lowest levels in over three decades. Measured by the so-called "GDP deflator", the OECD said inflation would fall to 1.7 percent this year and 1.6 percent in 2005 -- almost half the 2.9 percent rate from 2000. While this masks rising inflation pressures in the United States, it reflects falling inflation in Europe and persistent -- if easier -- deflation in Japan. There had been an overreaction to recent oil price rises, Cotis said. He was not worried about high oil prices. "There is now an (uptick) in the price of oil but I would certainly not be worried at this juncture. I don't think it would either derail price stability or growth," he told a news conference to present the report. Stocks fell across the globe on Monday amid fears that high oil prices would fuel inflation and that a potential rise in interest rates would stifle economic recovery. Oil in recent days hit nearly $40 a barrel.
MIND THE GAP
The OECD forecast the area-wide "output gap", a measure of the difference between actual growth and the potential growth rate above which economies generate inflation, at minus 0.9 percent in 2004, narrowing to minus 0.3 percent next year. This masked a large amount of economic slack in the euro zone economies, it said. The OECD estimates the euro zone output gap will expand to minus 2.3 percent in 2004 from minus 2.0 percent last year. This compares with an expected gap of minus 0.3 percent in the United States in 2004 and a positive gap of 0.2 percent there in 2005.///