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OECD upbeat on global economic situation

"Better-than-expected current performance should not be a cause for complacency in respect of the need for a continuation of fiscal consolidation."

the Organization for Economic Cooperation and Development's report on the global economy

The global economic outlook is bright for this year and next, the OECD said yesterday, while pressing governments to invest windfall tax revenues to avoid the "boom-bust" cycles of the past.

"The current economic situation is in many ways better than what we have experienced in years," said Jean-Philippe Cotis, the Organization for Economic Cooperation and Development (OECD)'s chief economist in the agency's twice-yearly report on the global economy.

A smooth landing of the US economy was being balanced by stronger growth in Japan and especially Europe, with emerging markets such as China and India also making sizeable contributions.

He said that although the US current account deficit remained large while China and Japan saw increased surpluses, "sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment."

He nonetheless urged officials "to save current tax windfalls," to prevent "in the long run, the repeat of those depressing `boom-bust' budgetary crises of the past.

"Decisive reductions in structural deficits appear both highly desirable and rather unlikely," he acknowledged, warning that "policymakers are facing treacherous waters."

Overall economic growth among the 30-member OECD should come to 2.7 percent in both this year and next the report estimated, down from 3.2 percent last year.

Inflation was forecast at 2.1 percent this year and 2 percent next year, down from 2.2 percent last year. Unemployment was expected to fall from 5.9 percent last year to 5.6 percent this year and 5.5 percent next year.

A major potential risk to the upbeat scenario however were housing markets, since the share of housing investment in overall growth had reached a 10-year high in half of all OECD countries and appeared set to fall back a bit.

In the US, "the housing sector has cooled somewhat more than expected," Cotis said, while the report pointed to possible negative spill-over effects "if problems in the sub-prime mortgage market lead to wider financial-market distress."

At present, financial markets remained generally supportive of growth owing to strong fundamentals and an appetite for risk, the OECD said.

Other growth risks included high prices for petroleum products and raw materials, though base metal prices were expected to begin declining owing to increased supplies.

Oil revenues, meanwhile, were being recycled more extensively, benefitting exports from the eurozone in particular, the OECD said.

The report stressed, however, that "better-than-expected current performance should not be a cause for complacency in respect of the need for a continuation of fiscal consolidation."

"The apparent slackening in the planned pace of fiscal consolidation in many OECD countries, particularly those were deficit and/or debt levels are high, is a cause for concern," it said.

Turning to monetary policy, Cotis said it "constitutes a challenge for central banks which, on both sides of the Atlantic, should probably err on the side of tightness."

Forecast US inflation of 2.6 percent this year and 2.2 percent next year would argue for not cutting interest rates this year, Cotis said.

"There may even be a case for additional tightening in the United Kingdom, should inflationary pressures persist, and more clearly so in the euro area, where core inflation has essentially reached the 2.0 percent mark, while activity is set to continue to expand vigorously," Cotis said.
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