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World recovery underway, says OECD

Japan has posted a better than expected economic performance recently.
Japan has posted a better than expected economic performance recently.

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(CNN) -- A global economic recovery is underway, led by Asia and North America, but there are still risks to growth ahead, the OECD warns.

The Paris-based Organization for Economic Cooperation and Development, which represents 30 of the world's advanced economies, said Wednesday the "strong momentum" already achieved in Asia, North America and the UK is evidence of this recovery.

It predicts the world's largest economy, the United States, will grow by 4.2 percent next year, up from 2.9 percent this year, while Japan and the Euro area will both register 1.8 percent growth in 2004.

The OECD's outlook follows the release earlier this week of U.S. data showing the U.S. economy is growing at its fastest rate in almost 20 years, with annualized GDP growth of 8.2 percent in the third quarter. (Full story)

The OECD sees the most likely economic scenario for the next two years as one of sustained growth in the United States and progressive recovery in Europe and Japan.

United States 4.2%
Japan 1.8%
Euro area 1.8%
European Union 1.9%
Total OECD 3.0%
Source: OECD Nov 2003

It says business investment is taking over from consumption as the main driver in the United States.

The OECD's outlook supports recent views by economists that for the first time since the Asian financial crisis of 1997-98, the key economies of North America, Europe and Japan are close to a synchronized upswing.

Asia is already setting a hot pace for the world, with China expected to post 8 percent GDP growth this year and India targeting 6 percent plus next year.

South Korea, Asia's fourth-largest economy , is expected to bounce back from its early 2003 slip into recession with about 5 percent growth next year.

South Korea and Japan are the only two North Asian members of the OECD.

The OECD said Wednesday that the American upswing had coincided with better than expected improvement in Japan, driven in part by better investment prospects in the manufacturing sector and fast-growing markets in neighboring Asian countries.

Despite this potentially rosy confluence of growth, the OECD warns of risks ahead. They include European businesses still being vulnerable to balance sheet problems, and the heavy levels of household debt in the United States, the UK and Australia.

Much of this debt is related to speculative property investment, meaning a sudden increase in interest rates could see large income and wealth losses.

The OECD says the recovery outlook may also be complicated by the very large current account imbalances that persist in the United States, leading to exchange rate instability.

"A sudden weakening of the dollar could stifle a fledgling European recovery, " OECD chief economist, Jean-Philippe Cotis said in a commentary with the release of the outlook in Paris on Wednesday

"This would exacerbate the unevenness of the global upturn while not doing much to help reduce current account imbalances or tensions in the trade policy arena," he said.

Cotis told a press conference there was a "spectacular polarization" within OECD members of what he called high achievers and not-so-high achievers.

In the first category were countries such as Canada, the UK, Spain, Ireland, Australia and New Zealand, which showed little deviation from sustained growth.

In the second category were Japan and most of continental Europe. The United States, he said, with its resilience and strong long-term growth -- but deficit problems -- was a case in itself.

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