MercoPress. South Atlantic News Agency

OECD anticipates weakest growth in four years

The Organization for Economic Cooperation and Development, OECD said world economic expansion will fade in 2007 to its weakest in four years, dragged by a U.S. slowdown that will force the Federal Reserve to cut interest rates.

Growth among the group's 30 members will cool to 2.5% in 2007 from 3.2% estimated for this year and the weakest since 2% in 2003, the Paris-based group revealed in its semi-annual economic outlook.

The 2007 forecast was below the 2.9% anticipated in May.

Expansion in Europe and emerging economies will cushion the slowdown in the U.S. and Japan. Projected growth in the OECD, which excludes China and India, will be about half the 2007 global expansion of 4.9% predicted in September by the International Monetary Fund.

Jean-Philippe Cotis, OECD's chief economist said in Paris that "rather than a major slowdown, what the world economy may be facing is a rebalancing of growth".

Inflation, as measured by the gross domestic product deflator, was predicted next year will be 2.2%, the same as this year and above May's 2.1% forecast.

OECD predicts growth in the U.S. economy will slow to 2.4% next year from 3.3% in 2006 and the 3.1% predicted in May, as the housing market weakens.

Home building in the US has "further to fall", says the report.

While inflation will require the Fed to keep its benchmark interest rate "restrictive" for some time, having lifted it 17 times to a five-high of 5.25%, the OECD said rates could be cut in late 2007 if price pressures ease. OECD estimates rates will reach 4.75% by the end of 2008, by which time growth will be rebounding to 2.7%.

OECD predicts the Fed policy should help tame U.S. inflation and boost unemployment reached a five year low of 4.4%. Unemployment is forecasted to reach 4.8% in 2007 and inflation will slow to 2.6% from 2.9%.

But as the US economy cools the Euro zone should grow 2.2%, up from 2.1% in May's report. In 2006 expansion should reach 2.6% and 2.3% in 2008.

Domestic demand is accelerating in Europe as unemployment falls. After five interest-rate increases in the past year to 3.25% OECD predicts the European Central Bank will have to use some "moderate additional tightening" as insurance against the risk of inflation pressure down the line" with chances of growth even stronger than anticipated.

Borrowing costs will reach 3.75% by the middle of 2007 and 4% early in 2008, which should help push inflation to 1.9% in 2007, below the 2% target of the ECB.

Asked about the Euro recent surge to 20-month highs, Cotis said the currency remained within its "comfort zone" and "the moves are seen as not alarming".

OECD said the Bank of England was unlikely to raise interest rates again after lifted its key rate this month to a five-year high of 5%. U.K. growth in 2007 will match this year's 2.6%.

In Japan household and business spending continue to support the economy. OECD predicts growth of 2% in each of the next two years, compared with this year's 2.8%.

After increasing interest rates in July for the first year in six, the Bank of Japan should do so again "once a clear exit from deflation has been made" the report said. That gives the central bank room to leave the main rate on hold at 0.25% until the third quarter of next year, after which it will be raised to 1% by the end of 2008.

Outside OECD, Russia, China and India remain drivers of growth with the Chinese economy predicted to continue growing above 10% in each of the next two years.