- The Washington Times - Tuesday, May 24, 2005

PARIS (AP) — The Organization for Economic Cooperation and Development cut its forecast for 2005 economic growth in the industrialized world to 2.6 percent from 2.9 percent yesterday, blaming a slower-than-expected recovery in Japan and yet another false start in Europe.

In a twice-yearly report, the OECD also raised its U.S. growth forecast to 3.6 percent from the 3.3 percent it predicted in November.

The Paris-based group of developed countries slashed its euro-area growth forecast to 1.2 percent from 1.9 percent and lowered its expectations for Japanese growth to 1.5 percent from 2.1 percent.

High oil prices and the stronger euro were only partly to blame for the wilting of the recovery in the 12-member euro zone in the second half of 2004, said OECD Chief Economist Jean-Philippe Cotis.

“As time passes it is becoming increasingly evident that circumstantial arguments … are not sufficient to explain the string of aborted recoveries in continental Europe,” Mr. Cotis said.

As a result, he said, future growth prospects “differ widely” among regions, “ranging from solid in Asia to back on trend in the United States, and weak and uncertain in Europe.”

Germany, Italy and other European countries should reform their economies and improve their poor resilience to external shocks, Mr. Cotis said, and the case for a further euro-zone interest rate cut now looks “rather compelling.” The euro zone’s forecast return to a 1.7 percent growth rate by the final quarter of 2005 was based on an assumption there would be no more nasty surprises from exchange rates or oil prices, the OECD said.

The report comes a day after the head of the European Central Bank delivered a newly pessimistic view of the euro-zone economy. Addressing the European Parliament, Jean-Claude Trichet said he saw “no clear signs as yet of a broadening or strengthening of the growth dynamic.”

The Frankfurt-based ECB, which sets interest rates for the euro area, lowered its 2005 growth forecast earlier this year to 1.6 percent from 1.9 percent, and many economists expect it to do so again soon. But Mr. Trichet played down the prospect for any further interest rate cuts, pointing out that the current 2 percent rate is the lowest in European states since World War II.

In contrast, the U.S. economy is on course for a soft landing, the OECD said, forecasting a growth rate of 3.4 percent for the second quarter, compared with the 3.2 percent it had predicted six months ago. The report predicted a 3.3 percent expansion in 2006 after this year’s 3.6 percent and last year’s 4.4 percent.

But it warned that inflationary pressures could still lead to a “harder landing than projected” and called on the Federal Reserve to raise interest rates to avoid overheating. Higher oil prices and labor costs are already feeding through into core inflation, the OECD said.

After a downturn in the second half of 2004, Japan is on track for growth of between 1.5 percent and 2 percent over the next two years, the OECD also said.

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