OECD Economic Outlook 69 - Biblioteca Hegoa

x - OECD Economic Outlook 69
Significant further monetary
policy action in the United
States will depend on the
persistence of the factors
driving the downturn,…
… while fiscal policy is
projected to ease
Macro policy in Japan has little
scope to offer further economic
stimulus,…
… but the Japanese economy is
in urgent need of restructuring
location of their export markets. On the other hand, a world-wide reduction in interest
rates would be beneficial for the highly indebted developing economies, especially
those in Latin America.
A weakening of the US economy over the second half of 2000, evident at the
end of the year, had been widely anticipated and, given capacity pressures, welcome.
However, the pace at which it occurred has exceeded most expectations. As investment
and output growth dropped sharply in the fourth quarter, consumer confidence
plummeted, and equity prices moved down significantly further. Against this background,
the Federal Reserve has lowered its key policy rate 200 basis points since the
beginning of this year to 4½ per cent. The projection for the US economy is based on
a modest further easing, which together with the earlier cuts, is expected to provide
support for a rebound in activity later this year. If, however, downward momentum in
the economy persists, larger reductions in interest rates may be required to restore
activity.
Under the assumption that Congressional legislation resulting from the Administration’s
tax proposals yields reductions that would begin to materialise later this
year, US fiscal policy is projected to ease starting in the second semester. However,
the shift will not be large enough to offset completely the effects of the fiscal
momentum still in place, and the policy stance will remain restrictive on balance this
year. Next year (and beyond), however, the effect of the policy easing is projected to
show through. Upward revisions to potential growth in the United States appear to
provide scope for such an easing, but the soundness of the Administration’s
longer-term fiscal strategy is crucially dependent on only modest increases in public
spending. It remains to be seen whether such increases, which appear to be well
below the projected growth rate of GDP and historical rates of growth for discretionary
spending, will be maintained as fiscal surpluses continue.
The Japanese economy is faltering and at risk of entering a downward spiral.
Last year’s weak pick-up in activity has faded, with the achievement of self-sustaining
growth forestalled by the inadequate pace of corporate restructuring and the renewed
build-up of financial sector problems. Weakening external demand is now exacerbating
the situation. At the same time, the scope for traditional macroeconomic policies
to provide additional stimulus is now rather limited: the scale of government debt
precludes significant further fiscal expansion and policy-determined interest rates
were already low even before the recent shift to a policy based on inflation objectives
and liquidity targets. A minimum requirement is that monetary policy needs to
remain easy until the economy has permanently exited from deflation. The current
degree of fiscal stimulus should be maintained this year, but the start of consolidation
cannot be delayed much longer. In the OECD’s projection, consolidation commences
in 2002; ultimately it may amount to 10 per cent of GDP or more by 2010, just to
stabilise public debt (at a very high level). The establishment of a coherent
medium-term consolidation plan would assist private-sector planning for these inevitable
adjustments.
In light of these constraints, policy efforts should concentrate on tackling the
underlying structural problems. The authorities need to take urgent action to deal
with balance sheet problems in the financial system. This might impose further costs
in the near term, although it is possible that improvements in confidence could partly
offset these negative effects. Steps toward financial system restructuring might
include: a detailed appraisal of the quality of banks’ loan portfolios; a realistic
assessment of bank capital; debt forgiveness or repossession of collateral; and a will-