If governments do not steer economies back on course to correct imbalances, the markets will eventually do it for them.
The chances are increasing that the global economy will suffer a hard landing, with currency markets savagely dumping the US dollar and throwing much of the world into recession, the OECD has warned.
[...]
"A large drop in the dollar would substantially damp the modest expansion projected for the euro area and Japan, especially if accompanied by falls in bond, share and house prices."
As an example, the OECD estimates that a 30 per cent greenback devaluation would throw Europe and Japan into recession, reducing their growth to roughly zero for two years, and wipe 10 per cent off the value of Wall Street stocks.
[...]
The report comes as ANZ Bank chief economist Saul Eslake has warned that the US current account deficit is unlikely to be fixed without a recession.
The coming correction won't be pretty. How is that only the rest of the world seems to know and/or talk about the precarious condition of the world economy? It would appear that again, mainstream news sources have been effectively silenced about anything controversial.
Complete Article
We're on brink of ruin, OECD warns
By Tim Colebatch
May 25, 2005
If governments do not steer economies back on course to correct imbalances, the markets will eventually do it for them.
The chances are increasing that the global economy will suffer a hard landing, with currency markets savagely dumping the US dollar and throwing much of the world into recession, the OECD has warned.
In its latest economic outlook, issued last night, the Organisation for Economic Co-operation and Development implies that one scenario could have the Australian dollar jump to $US1, putting the economy under huge pressure when the brakes slam down on global growth.
But the Paris-based think tank offers some reassurance. It says most likely the world will muddle through 2005 and 2006 while not resolving its huge current account imbalances.
It forecasts strong debt-financed growth continuing in the US and Australia, and weak growth in Japan and the euro countries. Output growth in the OECD as a whole would slow from 3.4 per cent last year to 2.6 per cent in 2005 and 2.8 per cent in 2006. Its forecasts for Australia resemble the Government's. Output would grow by 2.5 per cent this year before stronger exports lift it to 3.4 per cent in 2006.
Investment would stay high, while high export prices trimmed the current account deficit. But the OECD says Australia must accelerate reform in a range of areas, not only those the Government has tackled, but also to improve training and education, and strengthen competition. The report warns that if governments do not steer their economies to correct the widening imbalances, the markets will do it for them, with a big currency shift that would bring world growth to a screeching halt.
"These continuing divergences in domestic demand . . . cannot be treated with benign neglect," it said. "Given the unsustainable US current account position, pressures for correcting existing imbalances will become ever larger."
"At some point, they may take the form of an abrupt weakening of the dollar, with adverse consequences for the OECD area as a whole. Although not the most likely outcome at present, such an unpleasant scenario is gradually looming larger."
The OECD said the crisis could be set off by "a large adverse credit event, a realisation that the desired currency composition of central bank and/or private financial institutions' portfolios is shifting, an unexpectedly large rise in long-term interest rates, or yet some other factor.
"A large drop in the dollar would substantially damp the modest expansion projected for the euro area and Japan, especially if accompanied by falls in bond, share and house prices."
As an example, the OECD estimates that a 30 per cent greenback devaluation would throw Europe and Japan into recession, reducing their growth to roughly zero for two years, and wipe 10 per cent off the value of Wall Street stocks.
The report does not estimate the potential impact on Australia, but its methodology suggests it would also be severe. It assumes that China and other developing countries would maintain their dollar exchange rate, leaving the West to take the full impact.
The report comes as ANZ Bank chief economist Saul Eslake has warned that the US current account deficit is unlikely to be fixed without a recession.
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