Banking Woes Threaten U.S. Economic Recovery

Article excerpt

PARIS (AP) _ The U.S. economy is inching toward a modest recovery but remains threatened by a banking sector facing its worst crisis since the Depression, a 24-nation economic group reported Monday.

In its annual report on the U.S. economy, the Organization of Economic Cooperation and Development called banking reform an "urgent priority."

It also suggested raising U.S. gasoline taxes, by far the lowest among the 24 industrialized democracies in the organization.

The report said the economic recovery would be "muted" compared with expansion after previous recessions.

Output growth through 1992 was projected at an annual rate of 3 percent to 3.5 percent, well below the average of 6 percent in the four quarters following the seven most recent recessions.

The report predicted that unemployment would drop from more than 6.5 percent now to 5.5 percent by the end of 1993. The inflation rate is expected to fall from its pre-recession level of about 5 percent to 4 percent by the end of 1992, it said.

The major threats to the cautiously optimistic projections relate to supply of and demand for credit, the report said.

"On the supply side, the banking sector is in its worst shape since the 1930s and may therefore be unable or unwilling to finance a robust recovery," it said. "On the demand side, debt levels of both firms and households are high by historical standards."

The report saluted the resiliency of U.S. financial markets to weather recent stock market crashes.

"However, in recent years it has become increasingly apparent that one part of the financial sector _ banks and other deposit-taking institutions _ have experienced mounting difficulties," the report said. …