OECD Trims Developed World Growth Forecast as Risks Build

The Organization for Economic Cooperation and Development trimmed its growth forecasts for the biggest developed economies in the face of increasing geopolitical risks and subdued European inflation.

Euro-area gross domestic product is now expected to expand 0.8 percent this year, down from 1.2 percent in May, while the U.S. will expand 2.1 percent instead of 2.6 percent, the Paris-based OECD said today in a report.

“The bullishness of financial markets appears at odds with the intensification of several significant risks,” the organization said. “Continued slow growth in the euro area is the most worrying feature of the projections.”

The MSCI All Country World Index has gained 6 percent this year even as conflicts in the Ukraine and the Middle East have intensified and inflation in the euro-area has dipped to a fraction of the European Central Bank’s target rate.

The OECD, which advises its 34 member governments on economic policy, urged European officials to learn lessons from Japan where inflation expectations didn’t flag a later descent into deflation.

“The experience of Japan in the 1990s is a reminder that such expectations measures can be poor predictors of the actual future rate of inflation,” the OECD said. “The 6-to-10 year consensus expectations in Japan were similarly near 2 percent in the early 1990s, failing to foresee the descent into deflation.”

The OECD cut its GDP forecasts for Germany, France and Italy to 1.5 percent, 0.4 percent and a contraction of 0.4 percent, respectively. In 2015, those economies will grow 1.5 percent, 1 percent and 0.1 percent, generating growth of 1.1 percent for the euro area as a whole.

Brazil, China

Similarly, in Brazil the OECD foresees a weak investment and uncertainty related to looming elections as keeping growth below potential at 0.3 percent this year and 1.4 percent in 2015.

The outlook for other economies is brighter. The OECD sees Japan expanding 0.9 percent this year and 1.1 percent in 2015, while China is on track to grow 7.4 percent and 7.3 percent. India, the only major economy to have its growth forecast raised this year, will expand 5.7 percent in 2014 and 5.9 percent next year, the OECD said.

The OECD sees U.S. GDP growing 3.1 percent in 2015.

Growth in the U.K. is currently pegged at 3.1 percent in 2014 and 2.8 percent next year.

“In the U.S., the moderate underlying expansion remains broadly on track,” the OECD said. “China has so far managed to achieve an orderly growth slowdown” and “in India, confidence and spending have improved markedly during 2014 as a result of progress to control inflation and the perception that the new government will reinvigorate growth-oriented reform.”

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