Rebalancing of growth to prevent global economy being derailed: OECDnews
28 November 2006

According to a new report by the Organisation for Economic Cooperation and Development (OECD), though the US economy is running out of steam, the resurgence of Europe and Asia's growth engines will ensure that the global economy does not go off-track, as it did after the stock market crash of 2000.

According to OECD's chief economist, Jean-Philippe Cotis What is being seen is a slowdown, not a recession.

China, India and other fast-growing emerging economies such as Russia would keep going healthily and Europe's comeback this year contributed toward a "rebalancing" of global demand and output which mitigated the impact of a US slowdown that would have spelled trouble for all in decades past.

All in all, Japan and the euro area would grow slightly above trend over the next two years while US growth would return progressively to potential in the course of 2007, following the recent steep deceleration in activity.

The OECD cut its forecast growth in a US economy hit by a housing market slump, to 3.3 per cent for this year from the 3.6 per cent predicted previously, and predicted expansions of 2.4 and 2.7 per cent for 2007 and 2008 respectively.

Twice a year the OECD Economic Outlook analyses the major trends and examines the economic policies required to foster high and sustainable growth in member countries. Its current report analyses the major trends that will mark the years 2007 and 2008, providing in-depth coverage of main economic policy issues and policy challenges.

Forthcoming developments in major non-OECD economies are also evaluated for their bearing on the global economy. The report notes:

Until recently, the OECD had been enjoying a prolonged period of non-inflationary growth despite rising oil and commodity prices. Underlying these favourable trends, persistent wage moderation provided for price stability and strongly rising profits as well as vigorous job creation in the main OECD regions.

This smooth performance has been somewhat disturbed recently, however. In the United States, signs of inflationary pressures and labour market tensions have recently built up while investment in housing has fallen sharply, following a long boom in residential construction. In the OECD area as a whole, however, there are still few signs of general overheating.

Aggregate demand and supply broadly match, in contrast with the previous cyclical peak at the turn of the century when demand pressures were much stronger. While in the United States and Japan aggregate demand may be somewhat above trend, in the euro area substantial slack remains.

Rather than a major slowdown, what the world economy may be facing is a rebalancing of growth across OECD regions. Indeed, recent developments point to an unwinding of cyclical differences, with activity having slowed in the United States and Japan, and gathered speed in Europe.

Looking ahead, and given what is seemingly a mild degree of initial excess demand in the United States and Japan, the slowdown in these countries should remain well contained. In the euro area, recent hard data as well as business and consumer confidence suggest that a solid upswing may be underway.

In its initial phase, however, this growth rebalancing would not be strong enough to prevent a mild and short-lived weakening in 2007 in the OECD area.

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Rebalancing of growth to prevent global economy being derailed: OECD