Rich states face cuts in growth

PUBLISHED : Tuesday, 16 December, 1997, 12:00am
UPDATED : Tuesday, 16 December, 1997, 12:00am

The economic crisis gripping Southeast Asia could cut growth in the world's richest economies by up to 1 percentage point, the Organisation for Economic Co-operation and Development (OECD) said yesterday.

The body said the combined growth rate of its 29 member states could rise to 2.9 per cent, but said it had carried out a simulation exercise which showed the Asian crisis could knock nearly 1 percentage point off GDP growth next year.

It said the fall-out from the crisis could knock as much as 1.4 percentage points from Japan's economic growth, 0.7 percentage point from US growth and 0.8 percentage point from EU growth.

The report also sees strong EU growth with GDP rising 3 per cent in Germany and France in 1998 and 1999 with a 'steady, moderate tightening of monetary conditions'.

The OECD warned that the planned common interest rate under European economic and monetary union may cause problems for smaller countries, who despite healthy budgetary conditions might be forced to tighten fiscal policy.

It said interest rates in Europe's core economies were likely to rise to only 4.5 per cent, from the 3.3 per cent in the German repo rate.

The OECD said there was a 'somewhat uncomfortable degree of divergence in the cyclical positions of countries that might participate in EMU, notably between the three largest economies, where the expansion has been lagging, and most smaller countries that are at a more advanced stage of recovery'.

'The common level to which short-term interest rates in countries of the prospective euro area will converge during the run-up to EMU may in some cases imply unwelcome adjustments and create political tensions,' the report said.

The OECD report warned that Japan's poorly performing economy had become unpredictable and was contracting due to poor domestic demand, financial sector problems and regional turmoil.

The OECD was more upbeat on South Korea, citing fundamental economic strengths, but warned its forecasts might prove optimistic in light of Seoul's more downbeat projections.

The OECD said Korea would see GDP growth ease to 5.5 per cent next year from 6.2 per cent this year, in contrast to government forecasts of about 3 per cent.

'There is a clear risk that financial problems which have become more pronounced since the projections were finalised will lead to weaker domestic demand, higher inflation and a stronger current external balance than projected,' the OECD said.

It said poor Asian demand would hurt South Korean exports.