Economic gaps widen between Asia, EU and US

Differences economic performance are widening among Asia, Europe and the US, with possible long-term consequences for global growth and the stability of the dollar, the Organization for Economic Cooperation and Development (OECD) warned on Tuesday.

The US economy is enjoying a soft landing that may warrant higher interest rates to curb consumption, while growth prospects in Asia continue to strengthen, the agency said in its semiannual assessment of the global economy.

But in Europe, the outlook is dim enough that the European Central Bank must consider cutting borrowing costs by at least another half-point, from a historically low level of 2 percent, to stimulate growth, the OECD's chief economist, Jean-Philippe Cotis, said in an interview on Monday, before the report was released by the agency, which is based in Paris.

The recommendation came as the OECD cut its growth forecast for the economy of the 12-member euro region to 1.2 percent for this year, down from a forecast of 1.9 percent in December. The OECD said that it expected growth of no more than 2 percent next year.

Trimming to stimulate growth has been rejected by the European Central Bank, whose members have signaled in recent speeches that economic conditions do not warrant lower borrowing costs.

On Tuesday, more evidence of weakness emerged as an important survey showed that German investor confidence fell in May to its lowest level in six months..

Growth the US was forecast at 3.3 percent next year, down from 3.6 percent this year and 4.4 percent last year, Cotis said. But the current-account deficit in the US could rise to 6.7 percent of GDP next year, a level the agency said was unsustainable and could lead to a weakening of the dollar.

The current account balance is defined as the total value of a nation's imported goods, services and net return on foreign investment -- minus the value of its exports of goods and services.

In Asia, the agency said, China's pegging its currency, the yuan, to the US dollar was risky because it undervalued the yuan while increasing the chance for inflation.

The yuan's peg to the US dollar has already resulted in a 3 percent decline this year in its effective exchange rate against the currencies of all of China's trading partners, the agency said. Combined with the boom in textile exports after the abolition of international textile quotas on Jan. 1, the weaker currency would keep China's trade surplus expanding through next year, the agency said.

But the stimulus provided by China's economic expansion should continue to underpin strong growth in Asia, it added. Despite government efforts to prevent it, "the economy is accelerating again," Cotis said.

"The problem is still to contain activity," he said.

The OECD expects China's economy to expand at a 9 percent rate this year and accelerate to 9.2 percent next year, accompanied by a rise in inflation to 4 percent this year and next, from 3.9 percent last year and 1.2 percent in 2003.