OECD makes upbeat forecast for West

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The Independent Online
Prospects for the western economies have improved in the past six months despite the Asian crisis, according to a new forecast from the OECD. But its optimism depends on member countries getting their policies right. Diane Coyle, Economics Editor, weighs up the risks.

An "exceptional" performance by the American economy and a firmer recovery in Europe explain the more upbeat outlook in the Organisation for Economic Co-operation and Development's semi-annual economic forecast. It has revised up its predictions for growth in the world's 29 leading economies, saying they will expand by almost 3 per cent in 1998, just a shade lower than this year.

The influential forecast pencils in a soft landing for the UK, with growth slowing to a sustainable pace and inflation close to its target. It forsees no further rise in interest rates but warns that unemployment will start to rise next year.

The OECD also cautions that a minimum wage at too high a level would "jeopardise the employability of the low-skilled". In a submission to the commission on the minimum wage it has recommended a lower rate or an exemption for young workers.

Its prediction that the Asian crisis is set to have a relatively subdued impact on the rest of the world is likely to prove controversial. Although the report says the turmoil could potentially cut OECD growth by as much as 1 per cent over the next two years, it says member countries will use interest rate policy to offset the Asian spillover.

"Central banks can see it coming, and they should be able to absorb a lot of the effect by lower interest rates," said Paul Atkinson, head of economic assessment for the OECD. The worst of the crisis would therefore be confined to Asia itself, with the forecasts for Japan and Korea slashed.

However, some economists believe there is a risk recession in Asia will have a serious impact on the US and Europe. Gerard Lyons at DKB International, said: "It is right to take a cautious view about prospects for the rest of the world."

The OECD concedes that the outlook does depend on its Asian members, Japan and Korea, carrying out the appropriate policies too. It recommends tax cuts in Japan but worries that government policy measures "appear to be approaching their feasible limits."

For Korea, the document predicts a sharp slowdown from this year's likely growth rate of 6.2 per cent. The forecast for the OECD area as a whole in 1998 is that GDP will expand by 2.9 per cent, compared with the 2.7 per cent growth rate pencilled in earlier this year. There are almost no signs of inflationary pressure.

Britain's GDP is likely to expand by 2.2 per cent, a downgrade from 2.7 per cent. The successive interest rate increases since 1 May get the credit for cooling the economy to a steadier pace. In the money markets, sterling fell below 2.90 against the German mark, a 1 per cent fall on the day.

However, the report warns that the unemployment rate isunlikely to fall much further despite the Government's welfare-to-work programme.