PARIS, 26 October 2004 — The world’s leading economies and financial markets have held up well despite a steady rise in oil prices this year and investors are optimistic about their long-term prospects, the OECD reported here yesterday.
The Organization for Economic Cooperation and Development also warned that a sharp slump in the Chinese economy would hurt many of Beijing’s Asian partners, Japan in particular, and noted that Asian countries are reducing their purchases of US assets.
The overall upbeat assessment, which came in the OECD’s twice-yearly analysis of financial market trends, stood in stark contrast to the latest performances on European and Asian exchanges.
Markets in London, Paris and Frankfurt all reported sharp falls in early morning trading yesterday amid a fresh surge in oil prices to record high levels.
Equities sank as the New York oil price pushed further into uncharted territory, closing the week at a record $55.50 a barrel. New York’s main contact, light sweet crude for delivery in December, then hit a new all-time high of $55.58 a barrel in electronic trading yesterday.
The OECD concluded that in the third quarter — July to September — “expectations of a sustained upturn in the global economy” were underpinned in the world’s principal industrial economies. “Higher oil prices have less effect on the industrialized economies than they had some decades ago, and the recent hikes have only marginally slowed growth in the major OECD economies,” the report said. Volatile oil prices have only “dented” sentiment on equity markets, it added.
“As recent actual earning reports have been quite positive and major economies seemed to have been able to shrug off downside risks, especially the higher oil prices, investors seem to have regained confidence in equities,” the report said. “Investors seem to be basing their longer-term strategies on the overall positive outlook for the corporate sector.”
The study found that US corporate profits have been growing in the double-digit range since 2002, a trend likely to continue in 2004, and said the turnaround in profitability in the United States had been “the fastest in more than a decade.” In Japan, according to the OECD, equity market gains are likely to be supported by robust growth in exports and business investment.
Elsewhere, the OECD determined that markets had also reacted well to tighter monetary policies, notably in the United States. It said Asia, given its high dependence on oil imports, was facing inflationary pressures but added that positive economic conditions and high levels of foreign reserves should allow economies there to weather the oil price shock.
While investors remain confident that China’s red-hot economy will cool in an orderly manner, “a slump ... would hit many of its neighbors and in particular Japan, which owed more than a third of its GDP growth last year to China,” the report said.
It noted that Japan, the largest holder of US assets, had lately reduced its purchases, as had other Asian economies, and said China could also start to move away from US Treasury bonds because of dollar weakness.
“A sustained drop in these (Asian) investments, other things equal, could weaken the dollar and put upward pressure on interest rates,” the OECD warned. But it added that a slide in purchases of US Treasury bonds had been compensated by increased foreign purchases of US corporate bonds and equities.
