Global recovery on track: OECD

OECD chief economist Jean-Philippe Cotis said today he expects growth to accelerate in the US and the Eurozone in the first half of 2006 after the slowdown seen in the fourth quarter. Growth is expected to remain solid in Japan and the UK. According to the 12 page press briefing (PDF):

Economic momentum on both sides of the Atlantic somewhat unexpectedly weakened in late 2005, but is now back in line, by and large, with ..projections released three months ago. Indeed, against the background of high and volatile energy prices but still intriguingly low longterm interest rates, activity is estimated to have reaccelerated. However, some of the factors that have thus far sustained buoyant overall growth may no longer do so further out. ..one source of risk in this regard stems from stretched valuations in some housing markets.

Cotis said the US should expect a "sharp rebound" in the first quarter of 2006, while "Japan is now enjoying a broadbased recovery". The OECD see the Federal Reserve as nearing the end of its tightening cycle:

..monetary accommodation has now essentially been removed in the United States. However, with limited if any economic slack left and some pressures on costs there may be a case for limited further tightening, subject to the incoming data, including the evolution of house prices.

Rising domestic demand should underpin a rebound in activity in the Eurozone by mid-year, although output remains below potential and the ECB must avoid rushing to raise interest rates as growth picks up:

In the euro area, where core inflation remains subdued, headline inflation is reverting to target. Further out, removal of monetary accommodation should be based on unambiguous signs that slack is shrinking and that underlying inflation pressures are mounting.

As Chris Giles notes in the Financial Times online:

The OECD analysis suggests that neither of these conditions has been met: European output will be below potential this year and inflationary pressure remains weak. The criticism of the ECB, which came amid an optimistic interim assessment of the world economy, is bound to create irritation in Frankfurt. The bank has been at odds with the OECD since it called for a half-point cut in rates last spring.

Many economists and the OECD are sceptical about the need for further rates rises, although recent improvements in eurozone business and consumer sentiment have muted criticism of the latest ECB rate increases.

UPDATE: Claus Vistesen has also posted on this today, and includes some useful links to other posts.

Comments

[claus vistesen]

That FT article provides a good perspective ...

I.e. "OECD at odds with the ECB"

OECD calls for loosening - ECB tightens; who is right? Or should we really just realize the conundrum of setting an overall interest rate in Eurozone with asset bubbles in the south and sluggish growth in the north?

Also I think report is too optimistic concerning USA and Japan ...

http://clausvistesen.squarespace.com/alphasources-blog/2006/3/6/economic-outlook-for-oecd-countries.html

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