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OECD trims global growth forecast, but sees recovery gaining momentum

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The U.S. economy is expected to rebound after slowing because of harsh winter weather
Despite upbeat report, OECD warns of continued risk to global recovery from Great Recession

A leading international organization on Tuesday trimmed its forecast for global growth this year but said it expects the U.S. economy to rebound strongly after a winter slowdown and that the worldwide recovery finally was gaining momentum.

In its closely followed semi-annual outlook, the Organization for Economic Cooperation and Development said world economic output would increase a combined 3.4% this year. The estimate was down from a 3.6% forecast in November.

Growth will pick up to 3.9% in 2015, said the OECD, an organization of the world's 34 most advanced economies.

Despite the slightly downgraded forecast, the report was largely positive. It emphasized that the recovery from the Great Recession was strengthening, although it warned of continued risks.

"After six long years of pain and fear, the major advanced economies are finally building momentum," said Angel Gurria, secretary-general of the organization.

"While two of the four cylinders of the global economy’s growth engine -- credit growth and emerging market activity -- are still running below full speed, there are encouraging signs that the other two, trade and investment, are finally warming up," he said.

The U.S. economy is forecast to grow at a 2.6% annual rate this year, down from the previous estimate of 2.9%.

Much of that decline is because the economy barely grew in the first three months of the year, expanding at an anemic 0.1% rate largely because of harsh winter weather.

The OECD expects the U.S. to rebound strongly the rest of the year. It forecasts 3.9% growth in the second quarter as the economy catches up from the slow winter.

Growth is forecast at 3.5% in the third quarter and 3.4% in the fourth quarter. Next year, the OECD predicted, U.S. economic output will expand at a 3.5% pace.

Among the world's most advanced economies, "recovery is best established in the United States," the organization said. Conditions also are improving in the Eurozone, which is forecast to see 1.2% growth in 2014 after three years of contraction.

Less fiscal policy uncertainty in the U.S. is helping improve the recovery, the OECD said, but there are still major challenges to restoring the global economy to its pre-Great Recession levels, including the Ukraine crisis.

"Policymakers have to deal with the heaviest legacies of the crisis -- slow growth, high unemployment, growing inequalities and a loss of trust," Gurria said.

"The good news is they can now switch focus from avoiding disaster to addressing these challenges," Gurria said.

The OECD called on the European Central Bank to reduce its interest rate to zero, from 0.25%, and keep it there until the end of next year. ECB officials meet this week but are not expected to reduce rates.

The Federal Reserve cut its short-term rate to near zero in late 2008 and has kept it there ever since. Such accommodating monetary policy in the U.S. "remains warranted but should be scaled down gradually," the OECD said.

The Fed has been reducing its monthly bond-buying stimulus program and could start raising interest rates next year.

Returning to more normal monetary policy will be good for the world economy, but Fed officials must carefully explain their strategy to avoid roiling financial markets, the OECD said.

Copyright © 2014, Los Angeles Times
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