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World: OECD Joins Chorus In Reducing Economic Growth Forecasts

Another leading economic organization has joined the chorus in lowering economic growth projections for the year. The Paris-based OECD, linking the world's 30 most developed economies, says growth among its members will fall to less than half of last year's level. The organization says, however, that it expects economies to recover relatively quickly -- provided the European Central Bank moves to cut its interest rates to stimulate growth. RFE/RL correspondent Mark Baker reports the bank has been reluctant to take this step so far.

Prague, 9 May 2001 (RFE/RL) -- As with several other international organizations and governments in recent days, the Paris-based Organization for Economic Cooperation and Development (OECD) has sharply reduced its prognosis for economic growth this year.

The OECD said in its twice-yearly economic outlook report issued last week that the economies of its 30 member-states would expand by just two percent this year -- less than half of last year's 4.1 percent combined growth. The OECD links the world's most industrialized economies, including the U.S., Japan, and the European Union. Among members from Central Europe are Poland, Hungary, the Czech Republic, and Slovakia.

The OECD joins a growing number of research groups, international organizations, and national governments that have lowered their expectations for economic growth this year. The International Monetary Fund last month cut its forecast for the global economy and for the European Union's euro-zone, the 12 member-states taking part in the euro. The OECD also reduced its forecast for the euro-zone, saying member economies would grow 2.6 percent this year, down from an earlier projection of 3.1 percent. Just today, Britain's "Financial Times" reported that it also sees growth in the euro-zone slowing significantly this year.

In its report, the OECD blamed the contraction on the United States, the world's biggest national economy. The OECD says it expects the U.S. economy to expand just 1.7 percent in 2001, down from around 5 percent last year.

Andrew Dean, an economist with the OECD, says the slowdown was bigger than expected in the United States. He also tells our correspondent that growth in Japan, the world's second-largest national economy, has been disappointing:

"The slowdown has been greater than we envisaged last autumn, partly because the United States was predicted to have three and a half percent growth this year. It's now projected by the OECD to grow at one and three-quarters percent. But on top of that, Japan has been a little bit weaker than we envisaged previously, and the effect of the slowdown of the U.S. and Japanese economies has been to slow the European economies somewhat."

Dean cites two factors to explain why the U.S. economy, which was booming only a year ago, suddenly cooled off. He says the dramatic fall in the value of company shares traded on the stock exchange in the past year has led to what he calls a "wealth effect," meaning consumers feel "poorer" when they see the value of their investments fall. This leads them to spend less. He also says businesses, unsure of the economic climate, are spending less money on expensive investment goods, like computers: "As you know, there has been a very large stock market 'correction' in the United States and it has had an impact through a 'wealth effect' on consumer spending. But more importantly, there has been a very steep decline in investment from the very strong rates that we have seen in the past few years."

In its report, the OECD said the 2.6 percent figure was based on the assumption that the European Central Bank, or ECB, would reduce its benchmark interest rate by mid-summer.

But this is an assumption that may not hold true. The ECB, concerned with the relatively high level of inflation that persists within the euro-zone, has kept its main interest rate steady since last autumn.

This contrasts with central banks around the world, which have reduced interest rates to stimulate growth. The Federal Reserve, the U.S. central bank, has lowered its main interest rate by two percentage points in the past five months and another rate reduction is expected soon. Lowering interest rates tends to stimulate an economy by making it cheaper for businesses to borrow money.

The ECB's governing council meets tomorrow in Frankfurt to consider whether to reduce its main interest rate, the refinancing -- or "refi" rate. Most analysts say they do not expect a rate cut, although central banks operate under a high degree of secrecy and what the ECB will do cannot be predicted.

The bank has been coming under increasing pressure to reduce rates to stimulate the euro-zone economies as more and more governments and institutions cut their growth forecasts for Europe.

The strongest pressure has come from the International Monetary Fund, which says Europe must play a greater role in keeping the global economy growing.

The IMF's chief economist Michael Mussa, using exceptionally strong language, said last month that the ECB's policy of keeping interest rates steady was "indefensible" given the global economic slowdown. This is especially true, he said, because, in his opinion, Europe faces no real threat of inflation.

"In a period when [a] general economic slowdown is the main problem, and when inflation is not likely to be a continuing threat, the euro area -- the second-largest economic area in the world -- needs to become part of the solution rather than part of the problem of slowing global growth."

This statement directly contradicted the view of Wim Duisenberg, the ECB's president, who has consistently said fighting inflation -- not stimulating growth -- is the bank's main task. Dean says, however, that even if the ECB doesn't reduce rates soon, the euro-zone will continue to grow at a faster pace than the U.S. or Japan.

"If that easing [of interest rates] did not take place, then basically there would have been a judgement by the European Central Bank that conditions were reasonable as far as inflation is concerned in the euro area, and that activity was still staying relatively strong. We don't think that we would need to adjust our forecasts for the euro area much. Of course an easing [of interest rates] would mean [a] pickup in confidence perhaps."

For the Central European members of the OECD, Dean says that growth will remain robust. But he says that Poland, Hungary, the Czech Republic, and Slovakia will all feel the effects of the slowdown:

"Slowing in European growth would, of course, affect the Central European economies as far as their export performance is concerned. If you take countries like the Czech Republic and Slovak Republic, they've had strong export growth in recent years. We have built the slowing in the euro area growth into our forecasts for all of the Central and Eastern European economies. But even with that slowdown in European growth, we see general growth being maintained or picking up somewhat."

Dean points out that the main concern in Central Europe has less to do with external factors than with growing budget deficits -- something that lies within the governments' control. He says both the Czechs and Slovaks, for example, are running relatively large budget deficits at the moment.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.