OECD Lowers US Growth Forecast, Raises Europe’s and Japan’s

While Wall Street’s eyes were on Alan Greenspan and the Federal Open Market Committee meeting (where a rather ill-advised quarter point increase in US interest rates became reality despite the rise in oil prices), the real economic news came from Paris. The Organization for Economic Cooperation and Development, which is based in the French capital, announced that is was dropping its forecast for the US economy while boosting that for Europe and Japan. If correct, this will have far greater impact on capital flows that 25 basis points on the Fed Funds rate ever will.

The US economy is now expected to grow this year by 4.3%, a respectable amount but down rather noticeable from the OECD’s earlier projection of 4.7%. A change of 0.3% doesn’t sound like much, but America’s economy is currently in the $11.5 trillion a year. That’s $350 billion or so less than before – real money even by Washington’s standards.

Meanwhile, the Eurozone’s growth forecast received a bump to 2.0% from 1.6%. Germany will grow by 1.7%, up from 1.1%; France by 2.7%, up from 2.0%; and Britain (which is not in the Eurozone) will grow 3.4%, up from 3.1% if the OECD is correct.

The best news for the whole world is Japan’s improvement, set to grow 4.4% this, up from 3.0% as previously forecast. OECD chief economist Jean-Philippe Cotis put out a statement that read in part, “"Japan is ... in a position to finally exit the deflation trap over the next two years, provided macroeconomic policy stays the course and structural adjustment efforts, including in the financial sector.” A growing Japan would be a boost to Asian economies, and it would take up the slack from the US.

Capital flows to where investors believe it will be most productive, at best a subjective judgment. However, with Japan approaching its first boom in two decades, and with Europe moving towards wakefulness, any relative slowdown in the US economy will result in money moving out of the US and towards Japan and Europe. That will mean a lower dollar exchange rate, which will (in theory) help US exporters. But the money is likely to come out of the stock and bond markets, where foreign investors have placed their money in the first place. That foreshadows a weaker stock market and falling bond prices. Mr. Greenspan’s 25 basis points mean nothing in comparison.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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