The 24 nations of the Organisation forEconomic Cooperation and Development (OECD), hampered by
sluggish industrial output and trade, face slower economic
growth, and their joint balance of payments will swing into
deficit in 1987, the Economist Intelligence Unit (EIU ) said.
    The EIU said in its World Trade Forecast it revised OECD
economic growth downwards to 2.5 pct this year, compared with a
2.8 pct growth forecast in December.
    It said the new areas of weakness are West Germany and the
smaller European countries it influences, and Japan, hardest
hit by currency appreciation this year.
    The independent research organisation cut its 1987 growth
rate forecasts for West Germany to 2.2 pct from 3.2 pct in
December and to 2.3 pct from three pct for Japan.
    It said it expected the OECD to post a current account
deficit of some 13 billion dlrs in both 1987 and 1988, due in
large part to a 1.50 dlrs a barrel rise in 1987 oil prices.
    It said the U.S. Current account deficit looked likely to
fall even more slowly than forecast, to 125 billion dlrs in
1987 and 115 billion in 1988 from 130 billion in 1986.
    It said it expected West Germany to post a 31 billion dlr
payments surplus and Japan a 76 billion dlr surplus this year.
    The EIU said it saw oil prices dropping to around 16.50
dlrs a barrel by end-1987 and 15.50 dlrs in 1988 from about 18
dlrs last year, as adherence to OPEC output policy becomes
increasingly ragged.
    It said the dollar is poised to resume its decline in
foreign exchange markets, and will lose a further 13 pct on its
trade-weighted index this year and five pct in 1988 after last
year's 18.4 pct drop.
    The average mark/dollar rate is put at 1.80 marks this year
and 1.70 in 1988 while the yen/dollar rate is expected to break
through the 150 yen barrier with an average value of 150 yen in
1987 and 146 yen in 1988, it said.
    "This is not a crash scenario but the dollar's steeper angle
of descent increases the risk of ending with a fireball rather
than a three-point landing," the EIU said.
    "Talking will not stop the dollar's slide for long and the
February meeting (of finance ministers of the Group of Five and
Canada) produced scant promise of either a decisive shift to
more expansive policies in West Germany and Japan, or a tighter
U.S. Fiscal policy," it said.
    It said the key to the dollar's fortunes was the
willingness of Japanese institutions to buy U.S. Government
assets despite prospects of sustaining a currency loss.
    "Thus far they have been willing," the EIC said, adding that
if Japan was deterred from buying U.S. Bonds the dollar would
collapse.
    To contain such a currency crisis, dollar interest rates
would have to soar, bringing recession and a Third World debt
crisis, it said.
    On trade, the EIU said prospects for 1987 look "increasingly
sick."
    Import growth, forecast in December at 4.5 pct, is now seen
slowing down to around 3.8 pct in 1987 with a recovery only to
4.2 pct in 1988, it said.
    The weakness of the West German economy is the biggest
single factor, with import growth there expected to feature a
sluggish 3.5 pct growth in 1987 against the 6.5 pct forecast in
December, the EIU said.
    On the export side, it said it saw weak demand in West
Germany affecting export prospects elsewhere in Europe, while
Japan's exports in 1987 would remain flat and sales by U.S.
Exporters would respond only marginally to a lower, more
competitively-priced dollar.
    It said in most of Europe and in Japan, raw materials and
oil will cost less in domestic currency in 1987 than in 1986.
    However, rates of inflation will edge up in 1988 to over
the current OECD average of three pct. Non-oil commodity prices
will show a modest dollar price increase in 1988 for the first
time since 1984, the EIU said.
    After a rise of 18 pct in 1986, the dollar price of
internationally traded manufactures will go up by 8.5 pct in
1987 and by five pct in 1988, it said.
    It said OECD industrial production would rise by only 1.6
pct in 1987 after a weak 1.5 pct increase in 1986.
 Reuter
