PARIS (Reuters) – Global economic recovery is on track, helped by a stronger United States, but threats ranging from high oil prices to European sovereign debt crises could yet combine to create a bout of stagflation, the OECD said on Wednesday.
The Paris-based Organization for Economic Co-operation and Development said the U.S. and euro area economies were growing faster than expected in forecasts six months ago, although Japan's economy was set to contract after the March earthquake, tsunami and nuclear crisis.
As a result, it said the U.S. Federal Reserve should look to raise interest rates this year, while the European Central Bank could afford to pause its tightening cycle for a while and Japan faced no pressure to act.
In its twice-yearly Economic Outlook, the OECD forecast world growth would ease to 4.2 percent this year from 4.9 percent in 2010 before accelerating to 4.6 percent in 2012.
"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," OECD Secretary General Angel Gurria said.
"There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies," he said.
The OECD raised its outlook for the United States from its last report in November, forecasting growth this year of 2.6 percent, compared with an estimate of 2.2 percent in November.
It was also slightly more optimistic about the outlook for growth in the euro zone, forecasting the bloc's economy would expand 2.0 percent in 2011, up from 1.7 percent in November.
But it slashed Japan's forecasts after the country's triple disaster in March. It estimated the country's economy would contract 0.9 percent this year, having forecast growth of 1.7 percent in November.
The OECD also cited a slow recovery in Japan as a possible threat to its economic partners, especially if global supply chains remain disrupted as a result.
The effect would be all the more damaging if coupled with a bigger-than-expected slowdown in China, a spiraling sovereign debt crisis in Europe and/or persisting uncertainty over budget policies in the United States and Japan, the OECD warned.
If those risks coincided with a renewed surge in oil prices, then the major economies could see stagflation -- the pernicious combination of stagnant growth and high inflation.
The situation was made all the more fragile by high levels of debt, with the average level of debt across the OECD expected to top 100 percent of output this year.
OECD chief economist Pier Carlo Padoan said major economies were not only strong enough to withstand fiscal tightening, but needed to get debt down to keep it from becoming a brake on growth.
"While in the short term there is a cost in terms of fiscal consolidation, there are big benefits in the medium term, both in terms of market response and especially (because) higher debt means lower growth," he told Reuters Insider TV.
FED SHOULD ACT
With European countries making more of an effort to cut their deficits than the United States, the OECD said there was a stronger case for raising interest rates in the United States than in the euro zone.
In a bid to keep rising inflation in check, the European Central Bank raised interest rates in April, to 1.25 percent, for the first time since the 2008-2009 economic crisis.
With long-term inflation expectations on the rise in the United States, the OECD recommended in the report "an initial and visibly positive rise in the policy rate from mid-2011."
It said the U.S. Federal Reserve should then follow up with a series of rate hikes, lifting the Federal funds target rate by one percentage point by the end of the year.
After the ECB's April move, the OECD said it did not need further increases in the immediate future, although rates should be lifted gradually through the course of 2012 to stand at 2.25 percent by the end of 2012.
The OECD said there was no need for an interest rate increase in Japan in the absence of any signs that inflation is rising there toward 1 percent.
But China must stay focused on taming inflation and raise interest rates by another 50 basis points even though its economy is slowing, it said.
(Reporting by Leigh Thomas, editing by Mike Peacock)
BANGALORE (Reuters) – Costco Wholesale Corp (COST.O) posted a higher quarterly profit as it sold more gasoline and got a boost from stronger foreign currencies.
The largest U.S. warehouse club earned $324 million, or 73 cents a share, in its fiscal third quarter ended May 8, compared with a profit of $306 million, or 68 cents a share, a year ago.
Costco, which sells everything from gas to diamond necklaces at a discount to its members, said net sales rose 16 percent to $20.19 billion in the quarter.
Sales at stores open at least a year, or same-store sales, rose 12 percent. Excluding inflation in gas prices and stronger foreign currencies, same-store sales rose 7 percent.
The quarterly results include a pretax charge of $49 million or 7 cents a share.
Shares of the company closed at $81.35 on Tuesday on Nasdaq.
(Reporting by Renju Jose in Bangalore; Editing by David Holmes)
HONG KONG (Reuters) – Buoyant commodities demand from emerging economies is straining tight supplies and putting more pressure on producers to ramp up output, Glencore's chief executive said on Wednesday.
A sell-off in commodities in the first half of May took some speculative froth out of the market but did not mean weakening fundamentals, said Ivan Glasenberg, chief executive of the world's largest diversified commodities trader.
Asian demand should underpin growth in commodities as global producers strive to keep pace with booming appetite from the region, he added.
"Commodities have just come off on the back of the China tightening, the Greek crisis and funds have liquidated part of their commodities portfolio," Glasenberg said after the company's shares debuted in Hong Kong.
"A lot of it, as I said before, has been funds creating a bit of froth in the market, but the underlying fundamentals of the commodities market is relatively strong because of the tightening of supply."
Mining companies face a challenge keeping up with robust Asian demand, he said.
"Asia's demand is still strong," Glasenberg said. "The big question is will mining companies around the world be able to continue increasing production to match the demand which is occurring in Asia?
"It's getting harder to produce more commodities in various parts of the world."
Glasenberg's comments came a day after Goldman Sachs and Morgan Stanley raised their price forecasts for oil, the world's largest commodity market.
Goldman increased its Brent crude price forecast to $120 per barrel for 2011 and to $140 for 2012, saying fuel demand growth will sap global inventories and strain OPEC's spare oil output capacity.
Barclays Capital said oil market fundamentals were intact despite wild swings in prices.
"Our view remains consistent in that we see current prices as a solid floor, and while short-term downside risk emanating from external events like the sovereign debt crisis cannot be ruled out, the highs for the year are not in yet," Barclays said in a report.
Brent dropped more than 1 percent to below $112 a barrel on Wednesday, after rising 2 percent on Tuesday following Goldman's revised estimates.
Morgan Stanley raised its 2011 Brent forecast to $120 and its 2012 estimate to $130, citing improved demand coupled with a loss in production from Libya.
After months of anticipation, Glencore went public last week with London's largest-ever listing.
On Wednesday, shares in Glencore International Plc (0805.HK) (GLEN.L) fell as much as 3 percent on their Hong Kong debut, tracking a weak start to the shares in the London leg of the offering the previous day and as retail investors found the offer price expensive.
Founded in 1974 by Marc Rich, a trading sensation who fell afoul of U.S. authorities, Glencore has subsidiaries employing tens of thousands and an oil division with more ships than Britain's Royal Navy.
Analysts agreed the outlook on commodities remained positive, given strong demand from developing nations.
"It is pretty much a consensus that prices will stay at what are historically very strong levels," said David Thurtell, an analyst with Citigroup.
"The outlook is very positive, there is a strong chance that on base metals we might not make new cycle highs but prices will stay up. Iron ore and coal are all looking strong. For oil its 100-plus outlook for sometimes."
ASIAN DEMAND STRONG
The 19-commodity Reuters-Jefferies CRB index (.CRB) is headed for a monthly loss of about 8 percent, its largest since November 2008 following a sharp sell-off in the first half of May. The index has fallen in 11 of the 17 past sessions, highlighting the volatility in commodities since the end of April.
Goldman said current copper prices offer an attractive opportunity to buy the metal. It also said recent weak data from top copper consumer China raises "some caution and we recognize that China may experience some further economic weakness before comfortably resuming a growth trend."
London copper rose nearly 1 percent on Wednesday, extending gains from the previous session after sliding 3 percent earlier in the week, although worries about a spreading debt crisis in Europe may limit its advance.
The grains market has avoided much of the May sell-off. Morgan Stanley said corn, soybean and wheat prices should rise this year and next because higher price tags are needed to encourage new acreage outside the United States to boost supply to keep pace with demand.
Chicago wheat rose around 1 percent on Wednesday as poor crop weather across top producing regions of the world supported the market, while corn firmed on forecasts of more rains in the U.S. crop belt.
(Writing by Naveen Thukral: Editing Sambit Mohanty)