By  on May 25, 2005

GENEVA — Economic growth in the world's richest 30 industrialized countries this year has been revised downward to 2.6 percent from the 2.9 percent forecast in December, a key global economic report said Tuesday.

But solid performances by the U.S. and China will help make up for much of the slack in European Union countries and Japan, the Organization for Economic Cooperation and Development's "Economic Outlook Report" said.

Largely due to a relatively successful "soft landing," the U.S. is still expected to post an above-average expansion, with a growth rate of 3.6 percent this year, up from December's 3.3 percent projection, and better than the 1.2 percent forecast for the EU and 1.5 percent for Japan, according to the OECD report.

The expansion in the U.S. has so far not been restrained by high energy prices or interest rate increases, the report said, and has been spurred by domestic demand and household and business spending supported by favorable financial conditions. In 2005, unemployment in the U.S. is forecast to fall to 5.1 percent from 5.5 percent last year, inflation is expected to average 2.4 percent and short-term interest rates should move to 3.4 percent, up from 1.6 percent last year.

Jean-Philippe Cotis, chief economist at the Paris-based OECD, at a press conference on the report, said in the U.S., "Residual slack has been absorbed and the economy is likely to continue to grow in line with potential. Several years into the recovery, activity is still largely driven by domestic demand, with little help yet in sight from net exports."

Failure to correct the existing global imbalances could result in "an abrupt weakening of the dollar," with adverse consequences for the 30 member countries of the organization, the report warned.

The OECD predicts China's economic growth will slow to 9 percent from the 9.5 percent posted last year. The report said domestic demand in the world's most populous nation "may slacken, but rapid export growth will limit the slowdown and produce a marked increase in the current account surplus."

The strength of China's export-led growth was also related to the country's currency policy that fixes its yuan against the dollar, which causes its goods to be priced lower than if the yuan were allowed to float freely or if the peg were adjusted, as the U.S. called for this month, the OECD's twice-yearly report said. Since the mid-1990s, China's currency has been pegged to the dollar at a rate of 8.28 yuan.This policy, the OECD said, also induced China's inflation, which in 2004 reached 3.9 percent, up from 1.2 percent a year earlier, and is projected to inch up to 4 percent this year.

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