U.S. economy to see faster growth after winter freeze: OECD

[May 06, 2014] By Lucia Mutikani

WASHINGTON (Reuters) — U.S. economic growth is set to rebound strongly in the second quarter as the scars of a brutally cold winter fade, but inflation pressures will remain tame through 2015, according to the Organization for Economic Cooperation and Development.

In its latest economic outlook published on Tuesday, the OECD forecast U.S. gross domestic product expanding at a 3.9 percent annual pace this quarter, and it said it expects growth to maintain a brisk pace for the remainder of the year as well.

An unusually cold and snowy winter held down GDP growth to a 0.1 percent rate in the January-March period, the government said in an initial estimate last week, and that figure already looks overstated.

Data on construction spending and factory inventories for March that have come in since the GDP report was released have proven weaker than the government had assumed, suggesting the economy likely contracted.

"However, forward-looking indicators, such as investment intentions and business expectations, and rises in measures of consumer and business confidence suggest activity is bouncing back," the Paris-based OECD said.

Growth is expected to average 2.6 percent this year and quicken to 3.5 percent in 2015, the OECD said, as gains in asset prices boost household wealth and the drag from fiscal policy continues to lighten. Growth averaged 1.9 percent last year.

"Household deleveraging and the rise in asset prices have caused household net wealth to rise significantly, which will help sustain consumption growth," the OECD said.

The OECD said the risk to its bullish growth forecasts was that business investment would rebound less vigorously than projected if firms' growth expectations faltered.

"On the positive side, households' stronger financial situation could reduce the savings rate, strengthening consumption more than projected," it said. "Economic growth could also be stimulated more robustly than expected by factors such as improved competitiveness and low energy prices."

INFLATION SEEN TAME

Despite the anticipated growth acceleration, inflation pressures are likely to remain benign, given sluggish wage growth. The unemployment rate is forecast averaging 6.5 percent this year, down substantially from 7.4 percent in 2013.

Growth in unit labor costs, however, is seen averaging only 1.0 percent, unchanged from 2013, and the inflation indexes tracked most closely by the Federal Reserve are seen trending below the U.S. central bank's 2 percent target through 2015.

"Monetary policy remains very accommodative, as is appropriate given slack in the labor market and weakness in price and wage developments," the OECD said. "Inflation has fallen to low rates, though some of the factors behind the fall are likely to be transitory, and wage pressures remain muted."

The Fed has been reducing the amount of money it is injecting into the economy through monthly bond purchases. It is expected to end its bond-buying program later this year and gradually start to raise interest rates around mid-2015.

In neighboring Canada, growth is expected to accelerate to 2.75 percent by the end of 2015, driven by exports. Consumption is forecast strengthening and investment in housing slowing to a more sustainable level.

The OECD forecast Canadian inflation rising to nearly 2.0 percent by late 2015.

"As inflation approaches the 2 percent target, monetary accommodation should be progressively withdrawn. Fiscal consolidation should continue as planned," the OECD said.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

[© 2014 Thomson Reuters. All rights reserved.]

Copyright 2014 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.