The world economy is set to bounce back strongly from its weakness at the end of last year, the west’s leading thinktank said on Monday, but the European Central Bank should hold off raising interest rates again until there are concrete signs the recovery in the eurozone is well established.
The Paris-based Organisation of Economic Cooperation and Development said it was encouraged by renewed strength in the United States economy — which was muted in the fourth quarter of 2005 during the hurricane season — and by a strong performance by Japan after more than a decade in the doldrums.
The OECD’s chief economist, Jean-Philippe Cotis, said the eurozone’s main problem was a strong recovery in forward-looking indicators of business sentiment had not been reflected in data on economic growth and unemployment, which remains higher than in Britain, the US or Japan. ”This is particularly striking in the three largest economies and especially in Germany, where activity stalled in late 2005 but where business confidence has reached very high levels, particularly in export-oriented sectors,” he said, adding that the German services sector, labour market and wages all remained subdued.
He said the OECD expected the 12-nation bloc’s economy to rebound in the first half of this year but cautioned the ECB against raising rates again. The central bank lifted its key interest rate last week for the second time in less than three months. It now stands at 2,5% and financial markets are pricing in rates at 3% or higher by the summer.
The report also said even if there were a robust recovery in the first half of the year, the euro area’s growth would still be ”significantly below potential”. Core inflation was subdued and headline inflation, which includes oil prices, was heading back towards the ECB’s 2% ceiling.
But the ECB’s president, Jean-Claude Trichet, said interest rates in the eurozone remained at historically low levels and monetary policy was still loose. The ECB’s belief that the recovery is becoming entrenched received some support on Monday from data showing a strong expansion in retail sales in the zone in January, although economists said this partly reflected the fact that the end of 2005 had been disappointing.
While urging the ECB not to raise rates too quickly, the OECD said the US Federal Reserve may need to raise interest rates further in spite of having already raised them to 4,5%. ”There may be a case for limited further tightening, subject to the incoming data, including the evolution of house prices,” said Cotis. The OECD is expecting the US economy to expand by about 1% in each of the first and second quarters, almost twice the pace it is expecting for the eurozone and Britain.
Britain, the OECD said, is likely to continue growing at around its long-term trend level of about 0,6% quarter on quarter, although the Bank of England recently forecast that growth, which was weak throughout much of last year, would accelerate this year to above-trend rates.
The OECD was encouraged by the Japanese economy, which expanded by 2,8% last year, not far short of the 3,5% of the US and above the eurozone growth of just over 1%. Cotis warned the Bank of Japan, which has held interest rates at zero for the past four years in an effort to end the country’s long-running period of falling prices, not to tighten monetary policy too soon. ”Japan may at long last be exiting deflation, but only very gradually so, despite vigorous growth, which argues for keeping the policy interest rate at zero over the near term,” he said.
The OECD again warned industrialised economies to rein in their large fiscal deficits, now amounting to 3,5% of GDP across the G7 leading economies. – Guardian Unlimited Â