OECD to cut growth estimates

THE Organisation for Economic Co-operation and Development plans to cut its growth estimates for this year and next because of weaker-than-expected economies in Japan and Europe, a draft of its half-yearly forecast showed.

The Paris-based OECD expects expansion in its 30 member nations of 2.8% this year, down from a November forecast of 2.9% and last May’s 3.3% prediction.

The preliminary figures were discussed at a technical meeting this week and may be changed in the final report to be released on May 24, an OECD spokesman said.

An unexpected contraction in the economies of Japan and Germany in the fourth quarter amid surging oil prices sparked the OECD’s estimate reduction.

The International Monetary Fund also cut its forecasts for Japan and Europe yesterday. It maintained a global estimate of 4.3% on the strength of growth in the US, as well as China and India, which aren’t OECD members.

“The overall momentum lost in late 2004 will not be fully recouped in the course of 2005,” the OECD said in the draft report.

Risks to the projections “appear largely to be on the downside”, the draft report said.

The OECD estimates growth of 3% for 2006, down from November’s 3.1% projection. The OECD nations expanded by 3.4% last year.

“The revision seems realistic,’ said Juergen Michels, an economist at Citigroup Inc in London. “We have lagging growth in the euro region, strong growth in the US and a weaker development in Japan.”

Mr Michels forecast 2005 euro region growth of 1.6%, US expansion of 3.9% and Japanese growth of 1.4%.

Since the November forecasts, “currency changes among the larger economies have almost come to a halt”, the OECD draft report said.

Crude oil prices are about 10% higher than the OECD’s previous prediction for the first quarter of this year, the draft said. The OECD now expects oil prices to average $51 a barrel through the second quarter of this year before declining to about $47 a barrel by the end of 2006.

The US will power expansion among the OECD members for a fourth year in 2005, the draft said. The organisation raised its forecast for US growth this year to 3.8% from 3.3%. For 2006, the organisation trimmed its prediction for US growth to 3.4% from 3.6%.

China and India are the world’s fastest-growing major economies and each expects to expand more than 8% in 2005.

For the euro region, the OECD plans to lower its 2005 growth forecast to 1.7% from 1.9% and for 2006, it will trim its estimate to 2.4% from 2.5%. For Japan, growth this year will be less than half the OECD’s November estimate, at just 1%.

The IMF slashed its 2005 forecast for Japan to 0.8% from 2.3% in September. For the euro region, the agency lowered its growth estimate to 1.6% from 2.2%.

Given the anaemic growth rates in the Japan and the euro area, central banks in those regions will leave interest rates unchanged for at least the rest of 2005, the OECD predicts.

The European Central Bank has left its benchmark refinancing rate at a six-decade low of 2% since June 2003.

The ECB will raise its main rate to 3% by the end of 2006, the OECD forecasts.