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OECD Trims US, China Outlook, Warns on Monetary Policy

Sept. 3, 2013
"While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain," the OECD said.

PARIS - The OECD trimmed its growth forecasts for China and the United States Tuesday, warning that lasting recovery is still not firmly on its feet despite a rebound in some countries.

A central risk to recovery is how the U.S. Federal Reserve bank winds down its easy-money policies, the OECD said, a concern which has already upset several emerging economies.

Central banks that have provided stimulus need to maintain their lax monetary policies for some time, it advised.

"The pace of recovery in the major advanced economies improved in the second quarter and growth is expected to be maintained at a similar rate in the second half of the year," the Organization for Economic Cooperation and Development said.

"Activity is expanding at encouraging rates in North America, Japan and the United Kingdom, while the euro area as a whole is no longer in recession," it added.

Nevertheless, it said that the U.S. economy would probably grow 1.7% this year, compared to its forecast of 1.9% in April, after taking into account the latest data.

Japan's forecast was unchanged at 1.6%.

Growth for Britain was raised to 1.5% from 0.8%; Germany's increased to 0.7% from 0.4%; and France's forecast flipped to 0.3% growth from 0.3% contraction.

"While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain," it added.

The OECD now sees the economy of China, which is not part of the 34-nation group of advanced economies, growing 7.4% instead of 7.8%.

"Growth in China has seemingly already passed the trough and looks set to recover further in the second half of 2013, although the expansion is still expected to be more subdued than in earlier cycles," said the OECD.

It also pointed to the perils of the scaling back of U.S. monetary stimulus, which has led to capital outflows from emerging countries and tightening of financial conditions in much of the global economy.

"As emerging economies contributed the bulk of global economic growth in recent years, and since their share of global output has increased so much, this widespread loss of momentum makes for sluggish near-term growth prospects for the world economy," said the OECD.

"There is a risk that the financial market volatility and strong capital outflows in recent months in some emerging economies could intensify, exerting an additional drag on growth," it added.

Easy-money policies from central banks that have propped up demand are needed a while longer, said the OECD.

"It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimize the risk of the recovery being derailed," it said in its Interim Economic Assessment.

The OECD endorsed the Federal Reserve's plans to begin gradually reducing the monetary stimulus it injects into the U.S. economy from its current level of $85 billion per month.

It said Japan should keep up its stimulus efforts until deflation ends, while the eurozone should be ready to undertake further monetary easing if the recovery fails to take hold.

The OECD said the European Central Bank may need to undertake measures to boost sluggish lending such as "providing direct incentives to banks to extend credit to the real economy."

Despite subdued inflationary pressures in China, the OECD recommended caution over monetary easing if growth slows due to the fast increase in lending.

Copyright Agence France-Presse, 2013

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