OECD sees world growth of 4.2%, urges Fed to raise rates


PARIS (AFP) ― Crisis still stalks the global economy with stagflation lurking and Japan set for recession this year despite moderate overall recovery, the OECD said on Wednesday, warning against complacency.

The Organization for Economic Cooperation and Development held its 2011 global growth forecast steady at 4.2 percent in its latest semi-annual Economic Outlook report, but warned of negative uncertainty.

“The recovery is gaining strength but takes place at different paces,” the OECD’s chief economist Pier Carlo Padoan told reporters, adding there was “no room for complacency.”

The OECD’s secretary general Angel Gurria said: “The crisis is not over yet, it has just changed its skin.”

He warned that “downside risks dominate,” including the debt crisis in Europe and the threat of a slowdown in China.

Recovery is uneven, the OECD report said, switching its forecast for Japan to show a recession of 0.9 percent owing to the short-term effects of the March earthquake and tsunami. But it sees a strong recovery to 2.2-percent growth next year.

In the last forecast in November before the earthquake, the OECD had forecast that the Japanese economy would slow but still show growth of 1.7 percent this year and 1.3 percent in 2012.

The latest report said: “The earthquake and tsunami hit when Japan’s expansion appeared to be back on track, thanks to buoyant exports and improving labor market.”

The OECD raised its 2011 forecasts for the United States to 2.6 percent and for the eurozone to 2.0 percent.

But dangers off stage include possible increases in oil and other commodities prices, a slow recovery in Japan, a steep slowdown in China, eurozone debt problems, and the unsettled fiscal situation in Japan and the United States.

“All this suggests that the global crisis may not be over yet,” warned Padoan in his introduction to the report.

“A concern is that, if downside risks interact, their cumulative impact could weaken the recovery significantly, possibly triggering stagflationary developments in some advanced economies.”

Stagflation is a vicious mix of low economic growth and high inflation.

It can defy conventional policy tools which tend to improve one while aggravating the other.

The OECD, which groups 34 of the world’s advanced economies, said it expected overall inflation in its members to be 2.3 percent this year, up from 1.8 percent in 2010, before slowing to 1.7 percent in 2012.

It forecast unemployment to fall to 7.9 percent this year in OECD countries from 8.3 percent in 2010, and then drop to 7.4 percent in 2012.

“The global economy is exiting the recession but is not returning to business as usual,” Padoan said.

While forecasting that moderate economic recovery would continue, the OECD urged many of its members to undertake structural reforms to boost growth.

Fiscal consolidation needs to continue in many countries to stabilize debt levels, let alone get them back down below pre-crisis levels, it said.

“The United States and Japan, for which such requirements are among the largest, have yet to produce credible medium-term plans while other countries need to bolster medium-term fiscal targets by specifying the measures that will be implemented to achieve them.”

The easy money policies which have underpinned the recovery should be kept in place through 2012, the OECD said but also warned that interest rates should to start move up to avoid bubbles and dent inflation expectations.

“The need to keep close-to-zero policy rates for risk management reasons has now faded and an early upward adjustment in policy rates to establish a visibly positive level, as in the euro area, is merited in the United States and the United Kingdom, but not yet in Japan,” the OECD advised.

A rise in interest rates could also temper a rise in commodity prices, it suggested. It said one economic model had shown that a one percentage point drop in three-month US real interest rates added $4 to the price of oil.

The OECD found concerns that speculation had fuelled commodity price inflation to be misplaced.

“Recent commodity price increases have been broad-based, including in particular certain food commodities for which organized futures markets do not exist,” it commented.

The OECD said that although increased oil prices could feed through to other goods, it also noted that rising incomes in emerging countries combined with greater use of biofuels made from food crops had pushed up demand.