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OECD warns of rapid growth
BRUCE LITTLE
The economies of the leading industrial nations may be growing too fast for their own good, the Organization for Economic Co-operation and Development warned yesterday. The Paris-based think tank said having so many countries on a roll raises the risk that they will reinforce each other's growth and generate the kind of excesses that previously have often led to recessions. In its semi-annual economic outlook, the OECD urges governments not to add fuel to the fire by cutting taxes or increasing spending too much, and says that many central banks -- including Canada's -- will have to raise interest rates to cool their economies. Canada's economy is expected to grow 4.3 per cent this year and 3 per cent in 2001, a projection that echoes the consensus of Canadian forecasters. Although Canada's governments have moved to stimulate the economy with lower taxes and higher spending, higher interest rates and a slowdown in the United States will act to rein in the economy, the OECD says. The U.S. economy is expected to register growth of 4.9 per cent this year but slip back to 3 per cent in 2001. Among the Group of Seven industrial nations, those projections put the United States and Canada at the top of the heap, a condition that is expected to continue until the middle of the decade. From 2002 to 2005, the OECD says, Canada's growth rate will average 2.8 per cent a year, just behind the predicted 3.1-per-cent annual expansion of the United States. The average growth rate for the G7, which includes Japan, Germany, France, Britain and Italy, will be 2.6 per cent. The OECD specifically is urging Canadian governments to use any unexpected revenue windfalls to pay down debt rather than increase spending. If governments spend more, it implies, the Bank of Canada should increase interest rates further to prevent demand pressures from pushing up inflation. Even so, it says its existing forecast assumes that "further increases in short-term interest rates will be necessary to keep inflation comfortably within the target range [of 1 to 3 per cent annually] in the period ahead." In Ottawa, Finance Minister Paul Martin said higher spending on health care and research are government priorities, but Canada will do more to pay down its debt. In his February budget, Mr. Martin set aside $3-billion for debt relief, but yesterday he said that figure will be higher once he gets a handle on the exact size of the annual surplus. "As you see the surplus numbers that are coming in now, I'm quite sure that by . . this summer, when the [final] numbers are announced, we'll be paying down substantially more debt than people might have anticipated, and that's a very good thing," he said after a cabinet meeting. He also said that although the Bank of Canada should remain vigilant about rising costs, inflationary pressures remain in check. According to the OECD, Ottawa and the provinces acted as a drag on the economy in 1999 when their combined surpluses climbed to almost 3 per cent of gross domestic product from 1 per cent in 1998. The latest round of federal and provincial budgets included tax reductions and new spending that "imply a significant easing in the fiscal stance in the projection period," which goes to the end of 2001. The OECD's broad-brush warning to its 29 member countries, which account for about two-thirds of world output, crops up repeatedly in the 196-page report. In particular, the organization singles out rapid growth in world trade, risingConsumer Confidence and overvalued stock markets as reasons to worry about the future. "Such circumstances, when nearly all the economic news is good, invite excess and recall the global boom periods of the early and late 1970s and the late 1980s, each of which ended with rising inflation, financial imbalances and, eventually, widespread recession." The challenge, the report argues, is "to ensure that optimism is tempered by realism and that the global expansion is held in check on a sustainable non-inflationary path." It says the world economy is in the middle of a strong rebound from the 1997-98 slowdown that followed the Asian crisis "and is developing more favourably than it has for more than a decade." Most OECD members are enjoying solid above-potential growth, with falling unemployment rates and -- aside from rising oil prices -- low inflation. International trade surged in the second half of 1999, and the OECD figures that the volume of world trade, which climbed by less than 6 per cent in each of the past two years, will rise by more than 10 per cent this year and by about 8 per cent in 2001. The report has found little evidence that the underlying pace of inflation is rising through the OECD area, but it says "danger signals" have emerged. In addition to high oil and equity prices, "there is patchy evidence, much of it anecdotal, of property markets becoming overheated." Many economists regard a crash in real estate values as a much greater threat to expansion than a crash in stock markets.
24 April 2000 Washington Post Montréal story "Springs Back From 30-Year Decline"
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Report is wary of tax cuts, higher spending
Economics Reporter; With files from Mark MacKinnon in the Parliamentary Bureau.
Wednesday, May 31, 2000
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