News brief – March 2006

Recovery on track

The world economy appears to have overcome recent economic weakness in the US and euro area, and the recovery seems to be back on track. Speaking at a media briefing in March, OECD’s chief economist, Jean-Philippe Cotis, said that after weakening in late 2005, economic momentum on both sides of the Atlantic had picked up. “Indeed, against the background of high and volatile energy prices but still intriguingly low long-term interest rates, activity is estimated to have reaccelerated”, Mr Cotis remarked.

Jean-Philippe Cotis ©OECD/Laurent Emmanuel

But he warned that some of the factors that have sustained buoyant overall growth so far “may no longer do so further out”, pointing to stretched valuations in some housing markets as one source of risk that had been highlighted on earlier occasions. Nonetheless, the US should expect a firm rebound in the first quarter of 2006, while recovery in the Japanese economy appears to be broad-based.

Presenting interim projections for major economies–the next main OECD Economic Outlook will appear in May–the chief economist warned that while rising domestic demand should underpin a rebound in activity in the euro area by the middle of this year, output remains below potential.

Energy fuels inflation

Inflation crept up in January when the consumer price index stood 3% higher than a year earlier, up from 2.7% in December 2005. On a monthly basis, the price level rose by 0.3% between December 2005 and January 2006 after being unchanged between November and December. In the US, the CPI increased by 4% over the twelve months to January, compared with 3.4% in December. In Japan, the index was up by 0.5% in January on a year earlier, after a year-on-year decrease of 0.1% in December. Over the twelve months to January, the national CPI rose by 2.8% in Canada, by 2.4% in the UK, by 2.2% in Italy, by 2.1% in Germany and by 2.0% in France. Apart from Turkey, where the inflation rate stood above 10%, the highest inflation rate was in Iceland, at 4.4%, followed by Spain at 4.2%.

The main driver behind these increases was energy, whose price index leapt by 16.7%. The US recorded the sharpest rise, with 24.8%; its inflation rate, excluding food and energy, came to just 2.1%.

Leading indicators point up–

The prospect of a recovery is borne out in the OECD’s latest leading indicators, which show improved performances continuing in January 2006. The OECD Composite Leading Indicators (CLI) incorporate a wide range of indicators such as building permits, order flows, long-term interest rates and sentiment surveys in a bid to deliver early signals of peaks and troughs in economic activity. Figures out on 10 March show that moderate expansion lies ahead in the OECD area, with the six-month rate of change in the leading indicators rising for the ninth consecutive month. The most positive signals were observed in Japan, Germany and Canada, with the euro area up for the eighth consecutive month. For details on the latest trends, see www.oecd.org/statistics.

Source: OECD

–but joblessness down

The OECD’s standardised unemployment rate fell to 6.3% in January 2006, 0.1 percentage point lower than the previous month and 0.4 percentage point lower than a year earlier. In the euro area, the standardised unemployment rate stood at 8.3% in January 2006, which though stable compared with the previous month, was 0.5 percentage point lower than a year earlier. The US rate for January 2006 fell to 4.7%, 0.2 percentage point lower than the previous month and 0.5 percentage point lower than a year earlier. For Japan, the rate was 4.5% in January 2006, 0.1 percentage point higher than the previous month but unchanged from January 2005. For details, see news releases under www.oecd.org/statistics.

Hungary awards Mr Johnston

The president of Hungary, Laszló Sólyom, has conferred the Commander's Cross with the Star of the Order of Merit of the Republic of Hungary on the secretary-general of the OECD, Donald J. Johnston. The award was presented at a ceremony in Paris on 10 March 2006, in recognition of the support received by Hungary from Mr Johnston over the past 10 years. Hungary became a member of the OECD in 1996. A former lawyer, politician and cabinet minister in the Canadian government, Mr Johnston was elected to the post of OECD secretary-general also in 1996. He steps down in May this year after two terms in office.

Smart aid

Aid to the world’s poorest countries is expected to reach about US$130 billion by 2010, an increase of $50 billion from 2004 and twice the amount spent in 2000. But the aid hike in 2005-06 primarily reflects debt relief for Iraq and Nigeria and emergency aid in the aftermath of the 2004 tsunami. The OECD’s annual Development Co-operation Report, released in February, warns that as of 2007 when these debt relief operations are complete, donors will have to increase other forms of aid by around 10% per year, double the rate of recent annual increases. For this reason, the OECD has asked donor countries to honour aid promises and spend smarter.

The Development Cooperation Report notes improvements in the composition of aid, for example a 13.3% increase from 2003 to 2004 in funds going directly to long term aid programmes and projects. But more must be done to improve the effectiveness of aid. “Technical cooperation” accounts for about a quarter of all funding–$19 billion in 2004–but very little is known about its effectiveness. Most technical co-operation pays for study experts from donor countries, whose overheads, such as expatriation allowances, can cost more than their professional fees. The Development Co-operation Report suggests giving funds directly to developing countries so they can recruit who they want. If fairly done, this would save money and help build local capacity.

The report, which calls for an urgent increase in economic growth targeted at poverty reduction, notes that the twelve indicators contained in the Paris Declaration on Aid Effectiveness, signed in 2005 by over a hundred donor and developing countries, would help make aid smarter.

The Development Co-operation Report is available at www.sourceoecd.org/developmentreport.

Value added clarity

The OECD is launching a new project aimed at providing guidance for governments on applying value added taxes, or VAT–also called Goods and Services Tax, or GST, in some countries–to cross-border trade. In today’s environment of rapidly increasing international trade, particularly in the area of services and intangibles, a current lack of international “rules of the game” can lead to double taxation or unintentional non-taxation. What is more, businesses may be discouraged from making decisions because of the uncertainties in the application of these taxes. For their part, tax administrations struggle with applying the tax on international transactions where there are no internationally agreed rules.

The immediate focus of the new guidelines will be on services and intangibles. The project will subsequently consider issues such as fair taxation and double taxation. The OECD’s Committee on Fiscal Affairs, which has overall responsibility for this project, has integrated the setting of standards and the provision of guidance in the consumption taxes area as part of its core work.

See International VAT/GST Guidelines, available at www.oecd.org/taxation or www.oecd.org/dataoecd/16/36/36177871.pdf

Plus ça change…

More need–more given: Official aid contributions of member countries as a whole are likely to show further increases in 1962. In view of the vast economic gap between developing and the more advanced industrial nations, the needs are great. Equally important, the developing nations are demonstrating an increased capacity to absorb and utilise effectively a greater volume of financial aid.

From OECD Observer No 1, November 1962, p20.


©OECD Observer No 254, March 2006




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