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OECD sees fastest growth in 4 yrs, US rates rising

(recasts)
By Paul Carrel
PARIS, May 11 (Reuters) - The world's richest economies are
set to grow at their fastest rate in four years in 2004 and,
while inflation will stay low, U.S. interest rates at least
should start to rise this summer, the OECD said on Tuesday.
In its semi-annual Economic Outlook, the Organisation for
Economic Cooperation and Development said the global recovery
was now "strong and sustainable" -- trumpeting a rebound in
investment spending, especially information technology spending.
But the Paris-based think tank said now was the time to
change historically loose monetary policy in the fastest growing
countries, particularly the United States, where there was
little prospect of a tightening of fiscal policy.
"For the U.S., the main risk is that macroeconomic policies
remain too expansionary too long during the upswing," OECD chief
economist Jean-Philippe Cotis told Reuters in an interview.
"The general message we have is basically withdrawals (of
stimulus) should be started sooner rather than later," he said.
Asked whether June would be a reasonable time for the
Federal Reserve to start raising interest rates, Cotis said:
"Yes, sure."
The Federal Reserve has held the federal funds rate at 1.0
percent, its lowest since 1958, since last June. The next Fed
policy meeting is a two-day affair on June 29 and 30. Any U.S.
rate rise would be the first since May 2000.
Cotis said rate rises should be measured: "Incremental is
the best option, but it could depend obviously on
circumstances."
A MULTI-SPEED WORLD
The OECD raised a warning flag about the significantly
differing speeds of growth and, in particular, the lagging
performance of continental European economies.
This, it said, could hamper an unwinding of large and
potentially destabilising imbalances in the national accounts of
the United States and elsewhere, and risk abrupt financial
market adjustments to compensate -- such as a sharp fall in the
dollar.
"Although this Economic Outlook depicts a relatively smooth
scenario, a number of risks surrounds the latter," Cotis said in
the report. "Chief amongst them is the risk of the world
remaining even more polarised than expected."
The report forecast real gross domestic product growth in
the 30-nation OECD-wide area of 3.4 percent this year, up from
2.2 percent in 2003 and its highest level since the 3.9 percent
recorded in 2000. The 2004 forecast was up from the 3.0 percent
rate it expected last November.
The multi-speed expansion is illustrated by an expected 4.7
percent growth rate in the United States this year and a 1.6
percent rate in the euro area.
Cotis said a cut in euro zone interest rates could help
underpin the recovery in the 12-nation currency zone. "Basically
price stability is really there," he told Reuters. "It may be
useful to cut ... We see it more as an insurance policy."
The European Central Bank left interest rates steady at 2.00
percent for the 11th straight month last Thursday.
NO OIL PRICE WORRIES
The OECD said that, despite the robust overall growth
outlook, inflation across the area was expected to ease further
to its lowest levels in over three decades.
Measured by the so-called "GDP deflator," the OECD said
inflation would fall to 1.7 percent this year and 1.6 percent in
2005 -- almost half the 2.9 percent rate from 2000.
While this masks rising inflation pressures in the United
States, it reflects falling inflation in Europe and persistent
-- if easier -- deflation in Japan.
There had been an overreaction to recent oil price rises,
Cotis said. He was not worried about high oil prices.
"There is now an (uptick) in the price of oil but I would
certainly not be worried at this juncture. I don't think it
would either derail price stability or growth," he told a news
conference to present the report.
Stocks fell across the globe on Monday amid fears that high
oil prices would fuel inflation and that a potential rise in
interest rates would stifle economic recovery. Oil in recent
days hit nearly $40 a barrel.
MIND THE GAP
The OECD forecast the area-wide "output gap," a measure of
the difference between actual growth and the potential growth
rate above which economies generate inflation, at minus 0.9
percent in 2004, narrowing to minus 0.3 percent next year.
This masked a large amount of economic slack in the euro
zone economies, it said.
The OECD estimates the euro zone output gap will expand to
minus 2.3 percent in 2004 from minus 2.0 percent last year. This
compares with an expected gap of minus 0.3 percent in the United
States in 2004 and a positive gap of 0.2 percent there in 2005.
((Reporting by Paul Carrel and Mike Dolan, [phone];
Editing by David Stamp; Email:[e-mail]; Reuters
Messaging:[e-mail]))
REUTERS
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