 |
| Source: OECD |
Jean-Philippe Cotis, Chief Economist of the OECD, the 30 member country government think-tank, today presented an interim assessment on the economic situation in its principal economic blocs, at a press briefing in Paris.
Cotis said that global rebalancing is under way, as foreseen in the Economic Outlook published late last year. The US expansion has shifted into lower gear and the robustness of the recovery in Continental Europe has been confirmed. Meanwhile, growth in much of Asia is holding up well. Oil prices remain jittery but are much lower than half a year ago, contributing to easing inflationary pressures. Equity prices have been volatile in recent weeks, as was the case last Spring, but to some extent this may reflect a measure of normalisation in the pricing of risk. On the whole, financial conditions are still favourable.
US growth has stayed below potential since mid-2006. Household consumption has been supported by high levels of wealth and lower oil prices but shrinking residential investment has been dragging down real GDP growth by over one percentage point. Exports have far outpaced imports, making for a substantial positive contribution from the external sector. Cotis says destocking was very pronounced in the fourth quarter, especially in the automobile sector, which may portend a positive contribution from inventories in the first half of 2007. Growth is projected to remain sub-par over the near term, weighed down by the ongoing adjustment in the housing sector but supported by the sustained job creation witnessed to date and by export market buoyancy.
Activity in the Eurozone has outpaced that in the United States in recent quarters, with growth above potential and largely driven by domestic demand. The German recovery has been particularly vigorous and the Italian economy has picked up more than expected, but growth has been fairly subdued in France.
The OECD says that Eurozone growth is likely to moderate somewhat in the first quarter of this year, partly on account of the value-added-tax hike in Germany, but should remain above trend. Business sentiment continues to be upbeat overall, and faster job creation should support household incomes and consumption. In the United Kingdom, growth has been stable around trend and is projected to remain so.
The Japanese expansion – the longest albeit not the strongest in half a century – is on track, notwithstanding the national account data’s volatility and sizeable revisions. Growth is driven by business investment, based on solid corporate profits, and exports, which have been boosted by a very weak exchange rate. Japan’s growth pattern remains unbalanced, however, with household consumption still lacklustre, reflecting muted wage developments, despite relatively low unemployment.
Turning to monetary policy, the OECD said that the US Federal Reserve has kept its policy rate on hold since mid-2006. Headline inflation has eased, as energy prices changed course, but core inflation is still a bit too high for comfort. However, with growth set to remain subdued in the near term, there is no compelling case for the time being to resume tightening.
In the Eurozone, Jean-Philippe Cotis said that accommodation has been largely withdrawn over the past few months, consistent with higher-than-expected growth. With inflation having recently surprised on the downside, the outlook for price stability looks fairly benign. In Japan, deflation is lingering on and the policy rate should not be raised before inflation is firmly positive.
Last week, the President of the European Central Bank Jean-Claude Trichet said at a press conference, following the decision of the Governing Council to raise the key ECB interest rate to 3.75%, that monetary policy remains accommodative, risks to price stability remain on the upside and the continued high growth of money/supply requires "very careful monitoring" against a backdrop of a robust economy.
Trichet said that interest rates remain "moderate," which is a change from the previous statements that levels remain low.
The use of the term "very careful monitoring" is a signal of another interest rate ahead but not an impending one, which would have been signalled by the term "strong vigilance."
- - - Trichet signals that ECB interest rate will peak at 4% in June: GDP growth forecast revised upwards
Fiscal outcomes have generally been more favourable than budgeted, thanks to the abundant revenues stemming from buoyant activity and/or asset prices. Compared with previous such episodes, more of the corresponding windfalls appears to have been reflected in consolidation. The OECD says that in most countries, however, additional efforts – notably on the spending side – are required to restore fiscal margins of manoeuvre. In particular, in the face of rapidly ageing populations, pension and health care system reforms are a matter of urgency.
