OECD applies axe to growth forecasts

Growth in the industrial countries this year and next will be far lower than the Organisation for Economic Cooporation and Development forecast as recently as December, the Paris-based think-tank admitted yesterday.

The OECD also predicts almost no change in high European unemployment levels of above 10 per cent during the next two years.

The substantially more pessimistic forecasts for the world's industrialised economies do not take account of further planned cuts in public spending by France and Germany in their efforts to qualify for the European single currency.

Their bid to meet the Maastricht criteria poses the risk of an even weaker outlook, according to the OECD's secretary general, Jean-Claude Paye.

France and Germany would not meet the Maastricht requirement of a government deficit below 3 per cent of GDP without further planned budget cuts, he said.

Mr Paye painted economic prospects for the industrialised world in a rosy light, saying there would be a pick-up in Europe and Japan during the course of this year. The US was on course for stable and non-inflationary expansion, he said.

However, turbulence in the financial markets last spring and the appreciation of the mark until last summer had led to much weaker growth at the end of last year than the organisation had anticipated.

It now predicts the OECD countries as a whole will grow by 2.1 per cent this year climbing to 2.5 per cent in 1997. This is down from its earlier forecasts of 2.6 per cent and 2.8 per cent.

The biggest revisions have been for Germany and the US. The OECD reckons the German economy will expand by a mere 0.5 per cent this year, compared with its previous prediction of 2.4 per cent. The 1996 outlook for the US has been downgraded to 2.3 from 2.7 per cent this year and 2 per cent from 2.8 per cent next year.

The forecast for US growth has also been affected by a change in the definition of GDP used by the government. The switch to "chain weights", which are updated for price changes, meant the forecast was starting from a lower base.

The OECD will not publish its forecast for other individual countries until next month but most will be revised sharply lower, too. Mr Paye said there was a danger that government budget cuts in Europe might make the outlook even weaker as countries were all acting together in order to meet the single currency deadline. But he thought governments could compensate for this by reducing interest rates.

Financial markets would help, too, by rewarding budget cuts with lower long-term bond yields, he argued. Cutting government spending had a favourable effect on confidence.

Kumiharu Shigehara, in charge of the OECD's forecasts,said any fiscal consolidation would be beneficial over time. "The difficulty would be the time profile," he added.

Mr Paye said the OECD would complete a report on multinational investment in time for next May's meeting of ministers.

The ministers' meeting in Paris today and tomorrow will also discuss the issue of labour standards in world trade.

The Paris-based think-tank, which has spent two years analysing the causes of unemployment, will today publish the final report in its jobs study with detailed proposals for measures to be undertaken by each member country.

OECD real GDP growth forecasts (%)

1996 1997

US 2.3 2.0

Japan 2.2 2.4

Germany 0.5 2.4

OECD Europe 1.6 2.7

OECD Total 2.1 2.5