Growth on Horizon but Oil Prices a Global Threat; Business Editor John Duckers Assesses the Organisation for Economic Co-Operation and Development's View of World Growth Prospects

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Byline: John Duckers

The United States is leading the world out of last year's sharp economic downturn, but recovery is still at risk from high oil prices and exaggerated stock market expectations for corporate profits, the OECD said yesterday.

In its twice-year Economic Outlook report, the Paris-based Organisation for Economic Co-operation and Development said the outlook for economic growth and world trade looked considerably brighter than in the wake of the September 11 terror attacks.

The OECD predicted US growth of 2.5 per cent this year and 3.5 per cent in 2003 after an estimated 1.2 per cent in 2001, with Europe also recovering and Japan eventually pulling out of protracted recession.

'In the absence of further large-scale terrorist aggression, the net long-term macro-economic impact of the September 11 shock is probably tangible but limited,' the OECD said.

It added: 'Uncertainty is marginally higher, and so are transaction and security costs.'

And it highlighted higher insurance costs, greater focus on defence spending and hindrances to trade from additional controls at airports and shipping terminals.

The OECD said it expected the US Federal Reserve to start raising interest rates from around the middle of the year after massively slashing benchmark credit costs last year to counter the downturn that hit well before the outrages in New York and Washington.

It said it saw the European Central Bank doing likewise for the euro zone, but advised it to wait until recovery was better established, by the end of the year.

With Japan hit by deflation and interest rates already near zero, the world's second biggest national economy had little room for manoeuvre and the best thing Japan could do to boost business was to sort out massive bad loans in the banking sector.

The OECD predicted growth of 1.3 per cent this year in the euro zone, with the pace of recovery accelerating towards the end of the year, and forecast 2.9 per cent growth in 2003.

In Japan, it predicted further shrinkage of 0.7 per cent this year, followed by a rebound as world trade picked up, producing marginal expansion of 0.3 per cent next year.

The OECD said other Asian economies had weathered the downturn well and that growth in China was expected to expand again by some seven per cent this year. Other large economies such as Russia had slowed but shown some resilience too.

'Latin America presents a mixed picture, but in general the Argentine crisis has had limited spillover effects on other countries in the region,' it said.

'Overall, the recovery both inside and outside the OECD area is likely to boost world trade growth from 2.5 per cent in 2002 to over nine per cent in 2003.'

The OECD, whose 30-country membership represents the bulk of the world's wealth industrialised economies, said the biggest risk to growth was high oil prices due to continued tension in the Middle East.

Its forecasts were based on assumptions of an oil price of $25 a barrel on average this year and next, but it said it was impossible to rule out higher levels.

The OECD also said stock markets appeared to be expecting excessive rebounds in corporate profits and that the recent stabilisation in share markets could unravel.

'While share prices are well below their 2000 peaks, concerns remain over high price/earnings ratios - market expectations appear to be for double-digit increases in profits,' it said.

'There is a clear risk that profits will be less buoyant and that market expectations will be disappointed.'

UNITED STATESThe United States, the wheelhouse of global economic growth, is in the middle of a recovery which should accelerate into 2003 as business investment and exports pick up, the OECD said.

It forecast growth in US gross domestic product - the broadest measure of total economic activity - of 2. …