Rich countries in reverse

PUBLISHED : Wednesday, 21 November, 2001, 12:00am
UPDATED : Wednesday, 21 November, 2001, 12:00am

The world's wealthiest economies are expected to contract for the first time in 20 years following the September 11 terrorist attacks, according to the Organisation for Economic Co-operation and Development (OECD).

'The terrorist attacks of September 11 and the associated disturbances have . . . inflicted a severe shock to the world economy,' the OECD said in its Economic Outlook released yesterday.

'Thus OECD-wide output is now estimated to be contracting slightly in the second half of this year - for the first time in 20 years - and is projected to remain very weak in the first half of next year,' it said.

The OECD economies combined were forecast to contract 0.3 per cent in real gross domestic product over the second half of this year, but the report did not specify if both quarters would record negative growth.

For the OECD as a whole, the word 'recession' - defined as two consecutive quarters of negative growth - was avoided, but this must be a strong possibility.

Before the terrorist attacks, the US economy was already slowing and was forecast to shrink 0.6 per cent in the second half of this year.

'The US, the epicentre of the shock, stands to suffer most directly and immediately and is gauged to be already in recession,' the OECD said.

It expected a global recovery to start in the second half of next year.

Growth in the OECD area was forecast to be 1 per cent next year and 3.2 per cent in 2003.

'A significant rebound of activity should take place in the second half of next year.'

It said the projection of a rebound was based on the assumption of 'a politically benign environment' and improved confidence among businesses and consumers.

'For the recovery to occur, it is crucial that the sentiment of insecurity prevailing since September dissipates,' the OECD said.

European Union growth was expected to slow to 1.7 per cent this year and 1.5 per cent next year. In line with the anticipated global recovery, growth was forecast to be 2.9 per cent in 2003.

Japan's economy was already weak before September 11 and was expected to contract 0.7 per cent this year and another 1 per cent next year.

Despite the gloom over the world economy, China was expected to post strong growth. The OECD said it would grow by 7.2 per cent next year after 7.4 per cent growth this year.

The forecast on China was more bullish than other organisations such as the International Monetary Fund, which recently cut its projection to 6.8 per cent for next year. The Asian Development Bank forecast 7 per cent for China's growth next year.

The mainland economy is being driven by domestic demand, with loose monetary and fiscal policies helping to make up for slowing export growth.

'The growth process is still characterised by unevenness and rising inequalities, with non-state sector investment lagging significantly behind that of the state-owned entities and consumption growing much more rapidly in urban than in rural areas.'

China's growth was expected to pick up to 7.7 per cent in 2003 on the back of a recovery in external demand and increased foreign investment following entry to the World Trade Organisation.

'Although foreign direct investment inflows may moderate temporarily as a result of the September attacks, they are expected to rise over the projection period as a whole,' the OECD said.

Import growth was expected to exceed that of exports, resulting in a declining current account balance in the next two years, from 0.9 per cent of GDP this year to 0.1 per cent in 2003.

Graphic: gdpgbz