Economy may recover in 2002

OECD Observer

Economic growth in the OECD area has been weakening since the autumn of 2000, but the outlook could improve. Growth is now projected to drop to 2% in 2001, half last year’s rate, before recovering next year to 2.5-3%.

At the same time, OECD-wide unemployment is projected to stop falling. Slower growth and a fall in oil prices will help to keep inflation low.

Interest rate reductions, some fiscal easing and lower oil prices should help to spur demand. In addition, the sustained pace of productivity growth in the United States, which was so remarkable in the last half of the 1990s, may be emulated elsewhere. Finally, weak inflation pressures should give monetary policy in most countries the scope to support activity further, if needed.

There are downside risks: stock market corrections, US household indebtedness, Japanese indebtedness, and weaker business investment are among them. In the US economy, interest rate cuts by the Federal Reserve could lead to a rebound later this year. The Japanese economy could enter a downward spiral though. Monetary policy there has to remain easy and fiscal stimulus be maintained, though fiscal consolidation should commence in 2002.

Growth in the euro area is expected to remain satisfactory. Structural budget deficits in some larger countries may warrant action to restore balance. In some smaller EU countries, high inflation is a risk, though excess demand may be quelled by market forces.

©OECD Observer No 226/227, Summer 2001 




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