OECD predicts recovery in US economic growth next year

The US economy will return to a growth rate of 2.75 per cent by the end of next year, and accelerate to the 3.5 to 4 per cent range in 2003, the Organisation for Economic Cooperation and Development (OECD) predicted yesterday in its annual report on the US economy.

The upbeat forecast of a return to growth in mid-2002 and a strong recovery within 12 months was issued on a day which suggested the worst has yet to come in the current US recession.

Consumer confidence in the United States slumped to its lowest level in more than seven years, according to a report that suggests a miserable Christmas season for American retailers.

Stocks plunged on Wall Street on the release of the report by the Conference Board, a New York-based private business research group, which said its index of consumer confidence fell to 82.2 in November, compared with a downwardly revised 85.3 in October. Economists had expected the index to rise to 87.9.

Analysts closely monitor consumer confidence for indications of future consumer spending, which accounts for two-thirds of the US economy and so far has remained fairly resilient in the face of recession.

The survey by the OECD said the US economy had most likely been pushed into recession by three developments: the bursting of the Nasdaq bubble, the subsequent shrinkage in the manufacturing sector and the September 11th attacks on the United States.

This would result in output falling in the second half of 2001 followed by "only sluggish growth" in the first half of 2002. As a result, the Paris-based organisation said, "real GDP growth is projected to be only around 1 per cent this year".

The sluggish growth would last "as consumers strive to increase savings during this period of heightened uncertainty and rising unemployment that is coming on the heels of a year-and-a-half of declining wealth."

Companies would most likely continue to trim investment in response to downward revisions to sales expectations, preferring to wait for the prevailing uncertainty to dissipate.

However stockbuilding will provide growth after sharp inventory cutbacks and "give some lift to activity by early 2002".

Fiscal stimulus and a sharply-eased monetary policy should then allow a pick-up in private-sector demand and activity around mid-year.

"Assuming that no further disruptions will come from military and political developments, real GDP is projected to grow around 0.75 per cent year on year in 2002, but close to 2.75 per cent through the year. A further acceleration to the 3.5 to 4 per cent range is expected in 2003, as pent-up consumer demand is unleashed and the overhang in the capital stock is overcome." The OECD warned however that in the interim the cyclical downturn would create a rapid rise in unemployment with the rate reaching 6.25 per cent on average this year, from its current 5 per cent, before it reverses course.

The risk to this forecast, the OECD stated, was that cutbacks in business investment might accelerate or that the world economy might weaken further.

Last week the OECD, whose 30 member countries account for most of the world's wealth, said in a global survey that it expected the US economy to contract by 0.6 per cent in the second half of this year and 0.1 per cent in the first half of 2002.

The OECD warned the US administration that its budget was likely to move into deficit after Congress passes a stimulus package of between $60billion (€68.1 billion) and $100 billion and that "a poorly-designed, excessively large package might even prove counter-productive if the perception becomes prevalent in the markets that public finances are impaired."

The report reignited hopes that the Federal Reserve would move to cut interest rates for an 11th time when it meets on December 11th. The short-term lending rate has already been reduced from 6.5 to 2 per cent this year, down to the lowest level since 1961.

The OECD cautioned against further cuts.

The Conference Board's Present Situation Index, which measures consumers' views of the economy today, plunged to 93.5 in November from a revised 107.2 in October.

Consumers' assessments of the economy were pessimistic, with 21.4 per cent rating business conditions "bad," compared with 20.7 per cent a month ago.

The one positive sign was that consumers were becoming more optimistic about the prospects for the future. The index is based on a representative sample of 5,000 households across the US.