ECONOMIC OUTLOOK: OECD CAUTIOUSLY PREDICTS GRADUAL RECOVERY.

Jean-Philippe Cotis emphasises that current geopolitical and psychological factors should not be allowed to overshadow some important economic issues that will shape the world recovery. He argues that "the brisk reconstruction of Iraq and good progress towards a more secure world would obviously help, but they will not translate into a robust recovery unless enough underlying economic momentum has been regained". Indeed, he suggests that from a purely economic standpoint, certain obstacles to recovery have been progressively lifted. Thus in Europe, inventories are generally seen as light and may play a useful role in restarting the economy. More generally, fiscal and monetary conditions across the OECD remain accommodating enough to support an incipient recovery. In this context, Mr Cotis suggests that monetary policy is best-placed to steer the recovery, whilst a significant easing of interest rates is desirable in the Euro-zone, where growth is likely to remain below potential over the coming quarter, whilst underlying inflation should slow down.

The OECD's analysis of the principal economic variables is as follows:

- Growth remains weak but should strengthen: The near-term outlook for the OECD area is one of weak and hesitant growth. Following the rapid resolution of the Iraq war, economic activity may be expected to firm up later in 2003, as geopolitical tensions recede. The pace of growth will then largely depend on how fully the imbalances that originally caused the downturn have been corrected. Growth is expected to be strong enough for unemployment to begin to decline in 2004. And while OECD economies are generally expected to share in the upturn, it remains heavily dependent on the United States.

- As-yet only limited signs of an investment revival: The financial headwinds which held back OECD economies in the wake of the equity price crash and corporate governance scandals have substantially abated, but there are as yet few signs of an investment pick-up. Having fallen significantly throughout the OECD area, capital spending appears to have bottomed out in the United States, despite continuing weaknesses in some sectors. While capacity utilisation rates in manufacturing remain well below historical averages in all three major regions, the "overhang" of shorter-lived high-tech capital appears to have been worked off.

- US-led upturn will broaden: As uncertainty dissipates, the US recovery is expected to be driven by a gradual...