China Could Help Accelerate US Recovery

Strong growth in China, as well as other parts of Asia over the next couple years, will help the US and other Western economies, according to a recent …

Strong growth in China, as well as other parts of Asia over the next couple years, will help the US and other Western economies, according to a recent forecast by the Organization for Economic Cooperation and Development (OECD). At the same time, the OECD cautioned that high unemployment and rising debt levels among its 30 member nations could present serious threats to economic growth and recovery. See the following article from Money Morning for more on this.

The Organization for Economic Cooperation and Development (OECD) more than doubled its 2010 forecast for developed nations, saying that strong growth in Asia – particularly China – would help pull the “more feeble” West out of its financial malaise.

After predicting in June that the combined economy of its 30 member nations would grow 0.7% in 2010, the OECD raised its forecast for developed economies to grow 1.9% next year and 2.5% in 2011. Economic output will contract by 3.5% this year, the Paris-based organization said today.

“We now have the numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, told Bloomberg News. “It’s still a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors.”

The OECD cautioned that the recovery is still fragile in developed nations, while pointing to China as the main catalyst for a global rebound.

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“The upturn in the major non-OECD economies, especially in Asia and particularly China, is now a well-established source of strength for the more feeble OECD recovery,” said the OECD, whose only two Asian members are Japan and South Korea.

U.S. gross domestic product (GDP) should expand by 2.5% in 2010 and eurozone growth will accelerate to 0.9%, the group said. In June, the OECD had projected 0.9% growth for the United States and flat growth for the eurozone. The OECD said Japan should expect GDP growth of 1.8% in 2010 instead of 0.7%.

That compares to 10.2% GDP growth in China.

The OECD also released its first 2011 forecasts, suggesting 2.8% growth for the United States, 1.7% growth for the eurozone, 2% growth for Japan, and 9.3% growth for China.

“Outside of the OECD, things are more buoyant, especially in Asia,” Elmeskov told Bloomberg. “The non-OECD countries weren’t affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies.”

These growth rates are far from guaranteed, however, as unemployment and growing debt presents a serious threat. The OECD said unemployment in its 30-nation bloc would increase by 21 million by the end of 2010, compared to 2007. Gross debt among developed countries may exceed their total GDP by 2011. Debt currently equates to 90% of the nations’ total GDP.

Because the recovery is inherently weak, the U.S. Federal Reserve and other policymakers should keep monetary policy loose. The group’s projects assume that the Fed and European Central Bank (ECB) will keep their interest rates unchanged for most of next year.

The Fed has set its benchmark Federal Funds Rate to a record-low range of 0%-0.25% and the ECB’s rate stands at a record-low 1%. Policymakers should maintain these rates despite the risks that asset bubbles will form, Elmeskov said.

“We are talking about a risk here, not something that is happening,” Elmeskov said. “One can say that given where we are there’s little alternative to very low rates but we need to be aware that they could imply the risk of bubbles forming.”

The following article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.

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