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. Last Updated: 07/27/2016

Report: World Economy on the Mend




PARIS -- The world's economy has rebounded from the regional crises of the late 1990s to promise ebullient growth of over 4 percent in the new millennium, the OECD said Tuesday.


Healthy expansion is in the cards if the United States, along with the euro zone, can engineer a "soft landing" by further increasing interest rates, to head off inflation risks, the Organization for Economic Cooperation and Development said in its latest Economic Outlook.


It warned, however, that the "New Economy" fever that recently gripped the stock markets could spoil the party - pointing out that boom cycles had been followed by bust and recession when euphoria got out of hand in the 1970s and 1980s.


It predicted overall global growth of 4.3 percent in 2000 and 3.8 percent expansion in 2001 after 3.1 percent growth last year, with U.S. growth of 4.9 percent this year and a near-term rise in rates taming racy U.S. growth to 3.0 percent in 2001.


In the 11-nation euro zone, prospects for growth and a fall in traditionally high unemployment are at their best in a decade, it said, predicting a 3.5 percent rise in gross domestic product this year and 3.3 in 2001, after 2.3 percent in 1999.


"The world economy continues to rebound strongly from the 1997-98 slowdown associated with the crises in the emerging market economies and is developing more favorably than it had for more than a decade," the Paris-based research center said.


"Outside the OECD area, many emerging market economies should see rapid growth in 2000 and 2001, following strong post-crisis recoveries in 1999."


The emergence of the new economy based on high technology and Internet-based activity promised new sources of growth, but financial markets needed to take a sober view of share values.


"Optimism about new technology and prospects for productivity have led financial markets to accommodate asset valuations that have often been out of l ine with historical precedents," the OECD cautioned.


"Such circumstances, when nearly all the economic news is good, invite excess and recall the global booms of the early and late 1970s and late 1980s, each of which ended with rising inflation, financial imbalances and, eventually, widespread recession," its report said.


The OECD said it expected the U.S. Federal Reserve to hike its key Fed funds lending rate to 7.25 percent by August, from 6.5 percent at the moment, to ease the pace of expansion. It expected further action if this did not quickly brake growth.


It saw the European Central Bank raising its key interest rate, the refinancing rate, to 5 percent from a current 3.75 percent more gradually over the next 18 months, balancing the need to nurture economic upturn and keep inflation in check.


In Japan, the world's second-largest national economy, the OECD said it believed economic recovery was afoot but still uncertain. It settled for a prediction of more modest growth of 1.7 percent and 2.2 percent this year and next.


It said the central bank could maintain an "easy" monetary policy to help growth but it expected the monetary agency to give up its zero interest rate policy by year-end.


Russia, whose currency crash and debt default in August 1998 shook emerging markets from Europe to Latin America, had made an impressive comeback and was seen racking up 4 percent growth this year, its strongest since the Soviet Union collapsed.


Asia, where the late 1990s turmoil started, had also sprung back better than foreseen, but was still vulnerable as the bank and corporate sectors struggled with debt reduction.


South Korean economic growth was seen hitting 8.5 percent this year, not so far from pre-crisis "Asian Tiger" strength.


Growth was returning in Latin America, another vulnerable spot during the emerging market crises, it said.


U.S. rate rises could limit the speed of some Latin American nation's exit from recessions last year, the OECD said.