Oecd Sees 3% Growth In 97, Serious Unemployment Problem In Europe

Economic growth should reach three per cent in the 29-country OECD this year, its strongest level in nearly a decade, but Germany and other European Union states run the risk of a jobless recovery, according to an OECD report.

The twice-yearly report by the Paris-based Organisation for Economic Co-Operation and Development predicts non-inflationary growth of 3.0 per cent in 1997 and a slightly slower 2.7 per cent rise in gross domestic product (GDP) in 1998.

The OECD, which has expanded from a grouping of established industrial nations in the 1990s to embrace Mexico, former Soviet bloc countries and South Korea, said over half of its member countries could expect growth on this scale at national level, with the United States and Canada doing relatively better.

 

But the outlook for Japan and major European Union countries, including Germany, France, Italy and some smaller EU nations, is less buoyant due to public spending restraint or other austerity measures and fragile consumer demand, the report says.

Unemployment across the 29 countries is expected to fall by about a million to 35.2 million by 1998, with the jobless rate easing to 7.1 per cent from 7.5 per cent in 1996, but it remains a serious problem in Europe, especially in big continental states.

The weakness of employment growth in much of the European Union may revive questions of whether a jobless recovery is in prospect in some countries, notably Germany, the June Economic Outlook report says.

While improving employment often lags an upswing in economic growth, persistent and relatively strong productivity growth in the European Union may be due to high labour costs and intensive capital investment at the expense of labour, it says.

The report says OECD economic growth should be helped by the need to meet rising demand in strongly growing non-OECD regions,above all from China and Asian countries. Expansions appear to be strong and well established, even if they are in some cases now quite mature, in the United States, the United Kingdom, Canada and most smaller EU countries, the report says of OECD members.

Output has also been rising in Japan, Germany, France, Italy and several smaller EU countries, but at a more hesitant pace, it says. In the major continental European countries, net exports have been a consistent source of strength, but consumer spending remains weak, while private investment has failed to strengthen much despite lower long-term interest rates.

The OECD predicts U.S. economic growth of 3.6 per cent this year, followed by a slowdown to two per cent growth in 1998. The economy may begin to slow in the second half of 1997 from its rapid first-half pace as the growth rate of domestic private spending tapers off under the weight of tighter monetary conditions, moderating income increases and the exhaustion of favourable stock adjustment affects, it says.

The OECD said it was assuming another rise of a half of one per centage point in the U.S. Federal Funds interest rate around the middle of 1997, after a quarter per centage point rise to 5.50 per cent in March, the first in more than two years.

The rise might be needed to slow economic growth, it said. The organisation expects Japanese growth of 2.3 per cent this year and 2.9 per cent in 1998. In the European Union, the OECD expects the German economy to grow 2.2 per cent this year and 2.8 per cent in 1998, while it predicts French growth of 2.5 per cent this year and 2.8 per cent next year.

Both countries, along with Italy, will overshoot the deficit reduction target implied by a strict reading of the Maastricht treaty to qualify for a European single currency that public deficits must be limited to three per cent of GDP. Frances new left-wing government wants a more flexible reading which is not excluded by the treaty.

The OECD says it expects public deficits in Germany, France and Italy to come in at 3.2 per cent of GDP in 1997 the test year for European monetary union. It predicts Italys deficitwidening the year after but those of Germany and France falling in line with the strict Maastricht interpratation.