OECD Sees Slowing of World Economy
A gloomy forecast of slow-to-stagnant economic growth in the industrialized world--with little to indicate improvement in the next 18 months--was issued here Thursday by the 24-nation Organization for Economic Cooperation and Development.
At the same time, the head of OECD’s Economics and Statistical Department, David Henderson, warned bluntly that “the main single requirement is to bring down the U.S. fiscal deficit.”
Based on assumptions of “slower growth, higher interest rates and actual data for the first half of the financial year,” OECD is estimating the U.S. deficit for the 1988 fiscal year at $190 billion, $15 billion more than the Reagan Administration’s February projection.
“Confidence is unlikely to be restored unless it becomes clear that this deficit is on a continuing downward path,” Henderson told reporters at a news conference held to discuss OECD’s regular midyear economic outlook report.
Higher U.S. Deficit Projection
Asked about President Reagan’s reiteration in his address to the nation on Monday that he would veto any congressional measures to increase taxes as a means of reducing the deficit, Henderson replied: “We are aware of the President’s position and that is one of the reasons why we are forecasting a higher budget deficit than the Administration has projected.”
He rated the U.S. deficit problem ahead of the problem of exchange rate stability because “intervention in foreign exchange markets can have little effect in the longer term if it is not supported by other measures.”
For the OECD as a whole, the midyear survey estimates overall gross national product “to be expanding currently at only 2% to 2.5% at an annual rate, and little acceleration is likely over the next 18 months.”
Henderson elaborated: “As we had expected, domestic demand growth during most of last year was rather ebullient in the OECD countries. But we underestimated the extent to which non-OECD countries would cut back on their imports, and OECD buyers would step up their oil purchases to take advantage of the very low market prices that obtained until the autumn. In consequence, we underestimated also the extent to which real net exports would hold back GNP growth.”
Along with these factors came the fall in the value of the dollar, raising inflationary trends and interest rates in the United States, and, Henderson said, “There was a sudden and unexpected weakening of business confidence and investment spending plans in Japan and Germany which caused us to revise downward our earlier estimates of growth demand in those countries.”
As for the outlook for individual countries, the survey forecasts a growth rate for the next six months of 2.25% for the United States and only 1.5% for both West Germany and Japan. It sees unemployment remaining stagnant at 11% for the industrial nations as a whole, probably creeping up to 11.25% in the first half of 1988.
Although the report takes favorable note of recent actions in both Japan and West Germany to stimulate growth, it is cautious about how effective these measures will be, both in their impact on domestic situations and on other countries and the overall OECD trade position as well.
