OECD cuts economic growth outlook

(May 24, 2005) Economic growth among the world’s major industrialized countries will slow through the rest of this year, according to the Organization for Economic Co-operation and Development (OECD), which has cut its projections for global growth from 2.9% to 2.6%.

The group predicts Canadian growth of 2.8% for 2005, rising to 3.1% in 2006. The strength of the dollar remains a concern for the Canadian economy, keeping growth below potential, OECD said in a report issued Monday.

“Uncertainties about the impact of the currency appreciation on activity have warranted a pause in monetary policy tightening, but further increases in interest rates will be needed from the second half of 2005 onwards,” the report states. “Activity is expected to accelerate somewhat in the second half of 2005, once the effects of currency movements have been worked through, before slowing next year.”

The report makes a passing reference to “political uncertainties” but seems to acknowledge the stability of the Canadian system by urging fiscal prudence, regardless of which party is in power. The report points out that the aging population makes debt repayment imperative, while demographics remain favourable.

South of the border, the group warns that Washington must adopt a more balanced approach and moderate both tax cuts and growing expenditures to control the ballooning national debt. The U.S. economy is seen finally slowing “towards potential” after defying high energy prices and rising interest rates.

“Although some of the monetary stimulus has been removed, further tightening is needed to contain emerging inflationary pressures, not least because long-term interest rates have remained surprisingly low,” the OECD report says. “With resource slack diminishing and unit labour cost growth picking up, core inflation has moved higher.”

The threat of inflation has been frequently cited by U.S. Federal Reserve chairman Alan Greenspan as justification for raising American interest rates over the past year. Canada, on the other hand, has left its key overnight lending rate at 2.5% since last year, and analysts anticipate no movement again when the central bank makes a rate announcement on Wednesday.

The OECD is made up of 30 member states, including the NAFTA states, much of Europe, Japan, South Korea, Australia and New Zealand. China is not a member and is therefore excluded from the report.

Meanwhile, a separate report released this morning from UBS suggests that the worst is already over in the U.S., in terms of overall inflation. While the bank predicts a continued rising trend in core inflation, this should be offset by lower oil and gasoline prices, bringing total inflation under control.

“We expect energy to deduct about 0.2 percentage points from the overall seasonally adjusted CPI in May,” the UBS report says. “Considering the strong ‘core’ CPI increases in the previous three months, the flat April reading is more likely a temporary respite instead of the start of any stabilization or deceleration of ‘core’ inflation.”

The bank predicts oil prices will stabilize in the third quarter around $47 US per barrel, a level approached in recent weeks. Counterbalancing the effect of cheaper energy, by year end core inflation is seen rising by 2.5%, compared to 2004’s 2.1% rate.

This rate should not hurt growth, however, as UBS says it “should be just about right” for above-average economic growth. The bank predicts upward revision of GDP at the end of the month, with an annualized rate of 3.6%.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com