The Hindu Business Line : OECD lifts Europe, Japan growth forecast

THE Paris-based OECD (Organisation for Economic Cooperation and Development) comprising the world's 30 wealthiest countries is "bullish" about the latest US Federal Reserve's decision to lift its primary interest rate by a quarter percentage point to 1.75 per cent.

This is the third time the Federal Reserve has raised its rate at a "measured pace". The common superstition in the financial markets is that when the US central bank raises its interest rate for the third time, the equity market often hits trouble. Hence, investors and analysts are keeping their fingers crossed as the Federal Reserve signals more interest rate rises to come, amid submission that global economic expansion is on course despite costly oil, which currently hovers between $45 and $48.

The central bank's statement is almost echoing its Chairman, Mr Alan Greenspan's,perception that despite recent high oil prices, the world's wealthiest economies have not been "knocked off course".

OECD has echoed similar sentiments in a statement by its chief economist, which stated that the economic growth in the world's largest economies was expected to pick up in the second-half after a slowdown in the second quarter. The US economic growth, according to the OECD, is seen at 4.3 per cent instead of the earlier forecast of 4.7 per cent. In an interim assessment of the world's economic prospects, the OECD states that G6 (Group Six) countries - the US, Japan, Germany, France, Italy and Britain - have withstood the shock of 40 per cent rise in oil prices this year and that G6 economies are still poised to grow by 3.5 per cent. Firm forecast from the OECD is published twice a year - in May and November.

The OECD predicts economic growth rate in the Eurozone region — comprising 12 European Union countries, which have adopted euro as their common currency — at 2 per cent instead of 1.5 per cent. According to analysts, this is a "bullish" prognosis if the current poor economic growth in Germany, France and Italy - amounting to "depression" is any criterion.

The German economic crises are further compounded by high unemployment, poor investment flows and above all Chancellor, Mr Gerhard Schroeder Government's inability to initiate structural economic, social and labour reforms. The current spectre of dissident workers striking sporadically en masse, particularly in poorer East German region and recent emergence of extremist left and right parties in the State Government elections, further contributes to depressing economic scenario in Germany.

On what premise has OECD based its bullish outlook remains to be seen in its November forecast.

At the same time, consumer buying in France, Italy and Germany is at its lowest ebb and most consumers are alarmed by prospects of long-term job uncertainty. The unemployment level in the European Union with the exception of Britain, Ireland and Holland is hovering around the 9-per cent mark and could easily move into double-digit rate with advent of unforeseen economic crises.

So far, the European Central Bank and the Bank of Japan have not triggered any rise in basic interest rates amid realisation that all time low interest rates may boost capital investment by small and large manufacturers to pave way for more employment. As yet, this is not happening.

The OECD has raised its growth forecast for Japan from 3 per cent to 4.4 per cent saying that Japan was finally in a position to escape its "deflation trap" within next two years.

All this is academically fascinating but according to market analysts and investors, "ground realities are not so reassuring." An editorial writer concludes that uncertainties are such that "the forecast (OECD's) should not be taken as the fact."