OECD Doubles 2010 Growth Forecast, Recovery to Widen

By Mark Deen and Simon Kennedy

Nov. 19 (Bloomberg) -- The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year and predicted a further acceleration in 2011 as China and other emerging countries power a global recovery.

The combined economy of the group’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris-based organization said in a report today. Output will contract 3.5 percent this year. The OECD, which advises members on economic policy, forecast 2010 growth of 0.7 percent in June.

The MSCI World Index has surged 69 percent in the past eight months as the world economy emerges from its worst recession in more than half a century. While the U.S. and the euro region will return to growth next year, mounting debt burdens will keep the expansion in check, the OECD said.

“We now have numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, said in an interview. “It’s still a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors.”

The MSCI index, down 0.6 percent today, was little changed after the OECD report was published. The yield on the benchmark German 10-year government bond stayed at 3.292 percent.

Output in the OECD economies will only return to the level achieved in the first three months of 2008 in the third quarter of 2011, underlining the damage done by the banking crisis.

Meltdowns

The U.S. economy will grow 2.5 percent in 2010 instead of the 0.9 percent predicted in June and the euro region will advance 0.9 percent instead of a projection it would stagnate, the OECD said. Japan will post growth of 1.8 percent instead of 0.7 percent. The forecast for China was raised to 10.2 percent.

“Outside of the OECD, things are more buoyant, especially in Asia,” Elmeskov said. “The non-OECD countries weren’t affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies.”

The OECD gave 2011 growth forecasts for the first time. The U.S. will grow 2.8 percent, the euro area 1.7 percent and Japan 2 percent. The Chinese economy will expand 9.3 percent, it said.

The relative weakness of the U.S. and euro region’s recoveries is prompting policy makers to put China under pressure to allow the yuan to appreciate more. President Barack Obama told Chinese leaders this week the U.S. expects to see progress by next year on making the exchange rate “more flexible,” Ambassador Jon Huntsman said.

Tighter Policy

Sluggish growth in the OECD means most of their central banks should be careful in tightening monetary policy as their economies recover, the organization said. Unemployment in the OECD region will increase by 21 million by the end of 2010 from 2007, taking the rate to 9 percent from 5.6 percent.

While non-conventional measures may need to be withdrawn in the months ahead to counter a “large overhang of liquidity,” interest rates shouldn’t start to move up until inflationary pressures begin to be felt, the report said.

“The recovery is weak and there is a lot of spare capacity,” Elmeskov said.

The OECD’s forecasts assume the U.S. Federal Reserve and the European Central Bank hold off on rate increases until almost the end of 2010 and the Bank of Japan maintains its benchmark rate at 0.1 percent through 2011, he added.

The ECB’s main rate, currently at 1 percent, will probably climb to 2 percent by the end of 2011 and the Fed’s benchmark will rise to 2.25 percent in that time from close to zero at present.

Bubbles

While unprecedented liquidity injections have raised concern about new asset bubbles that policy makers need to be aware of, they have yet to materialize, the OECD says.

“We are talking about a risk here, not something that is happening,” Elmeskov said. “One can say that given where we are there’s little alternative to very low rates but we need to be aware that they could imply the risk of bubbles forming.”

Even so, central banks and governments around the world must take care not to unsettle markets when they communicate how they will unwind stimulus measures, the OECD said.

For now, financial markets are buoyant and the return to growth is boosting corporate earnings. The Dow Jones Industrial Average and the S&P 500 Index have gained 19 percent and 23 percent this year and the price of crude oil has risen 77 percent. Gold has jumped 55 percent in the past 12 months.

In the U.K., William Morrison Supermarkets Plc said today that same-store sales rose 4.3 percent in the three months through Nov. 1. A.P. Moeller-Maersk A/S, the owner of the world’s largest container shipping line, said yesterday that the market will return to growth next year and that freight rates may rise.

“Unprecedented policy efforts appear to have succeeded in limiting the severity of the downturn and fostering a recovery to a degree that was largely unexpected even six months ago,” Elmeskov said in the report. “It is now time to plan the exit strategy form the crisis policies.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.netSimon Kennedy in Paris at skennedy4@bloomberg.net