OECD report says danger of world economic turmoil has lessened

The world economy is in less danger from financial turmoil than it was a few weeks ago, but risks to growth next year remain high, according to the Organisation for Economic Co-operation and Development (OECD).

The Paris-based think-tank forecast yesterday that the risks included a sharp fall in global equity markets, weakness in emerging markets and the failure of the Japanese banking sector to restructure.

The half-yearly report predicted world growth of 2 per cent this year and 2.1 per cent next year, followed by a recovery to 2.9 per cent in 2000.

It included a prediction of growth of just 0.2 per cent in Japan next year, but of 1.5 per cent in the US and 2.2 per cent in the European Union. Total overall growth among OECD members was forecast to be 1.7 per cent.

"The level of activity in the US and the UK remains high, but expansions there are clearly past their cyclical peaks and signs of slow downs, which could prove to be abrupt, have begun to emerge," the report said.

The predictions are more subdued than the organisation's last series of forecasts in March. Yesterday's predictions knocked 3.4 percentage points off the forecast for Japanese growth during 199899, and 1 percentage point off OECD area growth as a whole during the same period.

Mr Ignazio Visco, the OECD's chief economist, said the risks to the world economy had diminished, but warned that another fall in equity markets was probably the most likely risk. He said a series of sharp currency depreciations, Japan's failure to solve its economic and banking problems, and another round of emerging market turmoil were also major risks.

To recognise the potential risks to its central forecast, the OECD has included an unusually detailed discussion of the likely problems that could exacerbate the international slowdown.

"In particular, failure by Japan to resolve its banking problems and a further decline in domestic demand there could lead to renewed downward pressure on the yen, thereby setting off another wave of currency depreciations and upward pressures on interest rates in other countries in the region," the OECD said.

The report called for further cuts in US interest rates, by half a percentage point in the Federal funds rate, but this was before yesterday's announcement by the US Federal Reserve of a 0.25 percentage point cut in its Federal funds rate to 4.75 per cent.

In the euro-currency area, short-term interest rates are assumed to converge down to near the current German level.