When growth depends on a lack of interest

OECD economies need a gentle touch from the central bankers, says Richard Freeman

Economic growth has been dismally low in the OECD area for about 18 months. In the industrialised world GDP has grown at an annual rate of under 2 per cent since early 1995. The growth rate in Western Europe has been particularly weak at under 1.5 per cent.

Economists have claimed that the slowdown in growth is merely a pause as the industrialised world catches its breath before accelerating again. The episode has been compared with the growth pause in 1986. The main difference this time round is that stock levels were much higher at the start of this pause than in 1986. Also, this pause has lasted longer.

But the comparison is wrong for two other reasons. First, the 1986 pause affected only industrial production and not the whole OECD economy as it has this time round. In 1986 OECD GDP rose by a solid 2.8 per cent. Second, with the exception of 1994, OECD GDP has grown well below its longer-term trend since 1990.

Since 1990, the OECD area has grown at an average annual rate of only 1.5 per cent which is a particularly dismal performance. With such weak growth it is no surprise that unemployment in the OECD area has risen to unacceptably high levels.

To a large extent, the slowdown in growth, particularly severe in Europe, reflects the emphasis of policy in many OECD countries on both fiscal rectitude and stable prices. Both are very desirable aims but it is reasonable to query whether the quest for stability hasn't gone too far, too quickly. Most important, I query whether monetary policy in some major countries has been too much focused on stability against a setting of restrictive fiscal policies.

In answer to this question, most forecasters and financial markets are saying it hasn't. So are the leading international organisations such as the IMF and the OECD.

Almost universally, the experts are saying the pause in growth in the OECD is over. With the strong growth of the US economy in the second quarter, the emergence of Japan from a major recession and increasing indications of recovery in Germany, both the IMF and the OECD area are forecasting a stronger performance in the second half of this year and an acceleration into 1997. Trends in the UK add weight to this assessment.

The predicted acceleration in growth is admittedly not strong but it is nevertheless significant, with the OECD economy expected to expand at a rate of around 2.5 per cent from mid-1996 to the end of 1997. Many private forecasters are more bullish than the IMF or the OECD, especially for the UK.

There is no doubt that the outlook in the OECD area is looking brighter in the second half of this year than it has over the last year. But will the forecast pick up in demand, will activity be sustained into 1997 and will 1997 see near or above trend growth rates? I would not put a great deal of money on it.

With fiscal policies mostly remaining restrictive, a great deal depends on what central banks in the major economies do in the next few months. What happens to monetary policies is the major uncertainty in the outlook.

My hesitation about the strength of the acceleration into 1997 in the OECD area stems from the obsession with inflation of, mainly, central banks in Europe and Japan. I believe central bankers have mostly been concerned about inflation for far too long. The one possible exception is the Federal Reserve.

The main culprit in my view is the Bundesbank which, after all, dictates monetary policy throughout Europe. With inflation under 2 per cent and no signs of inflationary pressures for a long time ahead, it is unclear why the Bundesbank continues to fight a war it has long won. It is more than time to call a halt.

Without a significant reduction in the appropriate German interest rates in the near future, there is a real risk that the Bundesbank will kill off the fragile recovery now under way in Germany. A move in Germany away from what is essentially a hard-money policy would certainly be good for the rest of Europe as well as for Germany itself.

An easing of German monetary policy would help the weak southern European countries, particularly as they could follow suit without any inflationary concerns. It would also be a tonic for France whose recovery is still very much in the balance.

The odd man out in Europe is Britain where the Bank of England is calling for a pre-emptive rise in interest rates against future inflation. This call seems to me to be somewhat premature. Inflation is well under control and the economy is growing at a rate of under 2 per cent. A rise late in the year may be in order but it would be premature to act now.

In Japan there is also central bank pressure to raise interest rates. Low as rates are in Japan, a tightening of monetary conditions is the last thing the Japanese economy needs. As in much of Europe, the recovery in Japan is still fragile and any early move against phantom inflationary pressures could easily push the economy back into recession.

The major uncertainty is the US. Increasingly, the commentators are calling on the Federal Reserve to make a pre-emptive strike against inflation. The balance between raising rates and leaving them where they are is a fine one. For the time being I would take the risk of leaving them where they are.

My confidence in the strength of the upswing in the major economies would be very much strengthened if central bankers act along the lines I have suggested.

Richard Freeman is corporate chief economist at ICI.

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
News
videoWatch Lynda Bellingham's tragic final Loose Women appearance
Sport
A view of today's Spanish papers
football
PROMOTED VIDEO
Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
art
News
people

Sport
sportAtlanta Falcons can't count and don't know what the UK looks like
News
i100
Arts and Entertainment
High notes, flat performance: Jake Bugg
music

Review: Despite an uphill climb to see Jake Bugg in action, his performance is notably flat

News
The Putin automaton will go on sale next month in Germany
videoMusical Putin toy showing him annexing Crimea could sell for millions
News
news

Powerful images of strays taken moments before being put down

News
i100
Arts and Entertainment
S Club 7 pose for Children in Need 2001
music
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
'Right Here' singer Jess Glynne is nominated for Best Newcomer at the MOBO Awards 2014
musicExclusive: Jess Glynne hits out at 'ridiculous' criticism of white artists nominated for Mobo Awards
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voices

Arts and Entertainment
Russell Brand has written a book of political analysis called Revolution
books

Review: Witty banalities aside, the comedian has an authentic voice

Arts and Entertainment
Separated at birth? Frank Sivero (left) claims The Simpsons based Mafia character Louie on his Goodfellas character
arts + entsFrank Sivero sues Simpsons studio over allegedly basing mobster character on Frank Carbone
News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London