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Last Updated: Thursday, 24 May 2007, 11:15 GMT 12:15 UK
Japan and EU overtake US growth
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The OECD says an interest rate rise in the Eurozone makes sense
The Organisation for Economic Development (OECD) says that economic growth in other rich countries has overtaken the US this year.

The OECD says that world growth is being led by Europe and Japan, which is compensating for a US slowdown.

Growth in Germany has been stronger than expected, and is projected to be 2.9% this year, down from 3% in 2006.

Overall, the rich countries in the OECD are expected to grow by 2.7% in both 2007 and 2008, down from 3.2% in 2006.

US risks

Japan is also growing unexpectedly fast, at 2.4% this year, led by surging exports.

"The current economic situation is in many ways better than what we have experienced for years," said OECD chief economist Jean-Philippe Cotis.

US: 2.1%
UK: 2.7%
Germany: 2.9%
Japan: 2.4%
Source: OECD

Mr Cotis said the main risk to the "benign" central forecast was the "tricky" situation in the United States, where an over-extended housing market has slowed the economy.

But the slowdown "may be of a broader nature, and may involve a mild form of stagflation, with weaker trend productivity growth and output growth translating into more overheating".

The OECD is urging the US Federal Reserve to keep interest rates unchanged this year in view of the uncertainty.

Rate rises

Mr Cotis also warned that there would be need for further rate rises, notably in Europe, where core inflation is already at the 2% target and activity is set to expand further, and possibly in the UK, "should inflationary pressures persist".

The OECD is projecting UK growth of 2.7% this year, helped by migration which has helped keep wages in check, but it warns that greater government spending restraint will be needed in the future to reduce the budget deficit.

And it said that across the world were "imbalances" in housing and financial markets, with risk being under-priced, as measured by the spreads on bonds.

"Equity prices may be somewhat on the high side," it warns, "although current potential overvaluation in stock markets pales in comparison with the excesses that prevailed in the late 1990s."

Fiscal restraint

The OECD says that the strong growth has reduced budget deficits in many countries, but that policy makers should be careful not to spend their "cyclical" surpluses which could exacerbate a downturn later.

It says that "sticking to tight spending plans and waiting long enough before contemplating new tax cuts should be a 'categorical imperative' for forward-looking policymakers".

And it says that Germany, in particular, "has a golden opportunity to implement additional reforms to raise the long-term growth potential".

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