News brief - March 2007

OECD Observer

Rebalancing continues; GDP edges up–; –as inflation drops–; –and unemployment steadies–; –though trade slows; Aid: More effort needed; Tax break; Spain in the chair; Plus ça change…

Rebalancing continues
GDP edges up–
–as inflation drops–
–and unemployment steadies–
–though trade slows
Aid: More effort needed
Tax break
Spain in the chair
Plus ça change
Rebalancing continuesJean-Philippe CotisUS growth is shifting to a lower gear, while Europe’s robustness is confirmed. This is the key message from the OECD’s chief economist, Jean­Philippe Cotis, in his forecast update briefing on 13 March. Mr Cotis reiterated the view expressed in the latest Economic Outlook published in November that a global rebalancing was under way. The March interim assessment also sees the Japanese expansion continuing, despite lacklustre household consumption. The German recovery has been particularly vigorous and euro area growth should remain above trend, with business sentiment upbeat and faster job creation supporting household incomes and consumption.Oil prices remain jittery, Mr Cotis warned, but are much lower than half a year ago, contributing to easing inflationary pressures. And despite some volatility in equity prices in recent weeks, on the whole financial conditions were still favourable.US growth has been below potential since mid-2006, and Mr Cotis saw no compelling case for the time being for the US Federal Reserve to resume tightening. Though fiscal outcomes in the OECD have been more favourable than budgeted, reforms were still a matter of urgency because of ageing populations, pension and healthcare pressures, Mr Cotis said. The next OECD Economic Outlook will be published 24 May.For more detail, visit edges up–Gross domestic product (GDP) in the OECD area rose by 0.9% in the fourth quarter of 2006, up from 0.5% in the previous quarter, according to preliminary estimates. Among the G7 countries, GDP growth in the fourth quarter of 2006 ranged from 0.6% and 0.7% in France to 1.2% in Japan, which was the highest growth rate observed there since the first quarter of 2004. Italy recorded the highest quarterly growth in seven years with an increase of 1.1%. US GDP grew by 0.9% in the fourth quarter of 2006, somewhat higher than in the two previous quarters.In all G7 countries except Canada, for which no data are available, the annual growth rate was higher than in the previous quarter, with Germany achieving the highest annual growth of 3.7%.See inflation drops–Click here for bigger graphInflation in the OECD area fell to 1.9% year-on-year in January 2007. Consumer prices rose by 1.9% in the year to January 2007, compared with 2.2% in the year to December 2006. On a monthly basis, the price level rose by 0.1% in January 2007 after 0.2% between November and December 2006.In the OECD area, consumer prices for energy stabilised in January after a year-on-year rise by 3.8% in December. Consumer prices for food were up by 2.4% year-on-year in January, compared with 2.5% in December. Excluding food and energy, consumer prices rose by 2.1% in the year to January after a rise by 2% in December 2006. -and unemployment steadies-The standardised unemployment rate for the OECD area remained at 5.8% in January 2007, unchanged from the previous month and a 0.5% decrease from a year earlier.The euro area, US and Japan all experienced a 0.1% decrease in the unemployment rate from the previous month. For Canada, the rate increased 0.1% from the previous month but 0.4% lower than a year earlier. For details, see –though trade slowsThe latest figures in merchandise trade exports in the G7 countries show a fall of a seasonally-adjusted 0.4% in the third quarter of 2006 compared with the second quarter, while import growth stagnated at 1.3%. Despite the recent sluggish performance, G7 trade volumes continued to grow on a year-to-year basis, with exports 10.4% higher and imports up 6.4%. Germany emerged with the strongest trade growth of these countries compared with the previous quarter; exports rose by 6.4% while imports were up 3.1%. On a year-to-year basis, Germany also achieved the highest export volume growth in the G7 at 16.9%, while imports grew by a more modest 3.9%.Aid: More effort neededDevelopment donors will have to increase funding for aid programmes faster than any other public expenditure in order to fulfil their commitments to increase aid to $130 billion and double aid to Africa by 2010, says the OECD’s Development Co-operation Report. In order to meet those commitments, aid funding, recently rising by 5% per year, would have to rise by 11% every year from 2008 to 2010.The report reviews aid volumes, noting which donors give the most–the US by absolute amount, Sweden and Norway as a percentage of their gross national incomes–and which countries get the most: Iraq at $12.9 billion annually in 2004-05 and Nigeria at $3.2 billion, both boosted by exceptional debt relief.The report, which shows that aid equals more than half the GNI of Liberia, the Solomon Islands, and Sao Tome and Principe, warns that aid dependency can make governments less responsive to citizens’ needs and less likely to collect taxes. It recommends that donors encourage more representative government and lend support to civil society and a more independent judiciary and media.In 2005, Official Development Assistance (ODA) reached a record $106.8 billion, though some 20% of that went to debt relief for Iraq and Nigeria.Though the 22 member countries of the OECD’s Development Assistance Committee (DAC) continue to supply around 95% of total bilateral ODA, this is likely to decline as other countries increase their aid, the report notes. In 2005 non-DAC aid totalled $3.2 billion, with $1.7 billion of that coming from Saudi Arabia.Visit Tax breakAs globalisation raises the importance of developing the rules of the game in international taxation, a new measure has been introduced to broaden the mechanisms available to companies and individuals involved in cross-border disputes over taxes.The OECD’s Committee on Fiscal Affairs has agreed to modify the Model Tax Convention, which serves as a basis for most negotiations between countries on tax matters, by including the possibility of arbitration in such disputes if they remain unresolved for more than two years. Cross-border tax disputes can arise, for instance, when two states assert conflicting rights to tax an individual or company. Such situations can lead to double taxation.The continuing liberalisation of financial markets and the increase in cross-border mobility of capital and investment has encouraged large corporations and financial institutions to develop global strategies. This modification is important both for companies investing outside their home country and for individuals living and working in more than one country. With the increase in the number of cross-border disputes and complexity of cases, the introduction of additional resolution techniques is expected to help disputing parties deal more smoothly with cross-border tax cases.Further details are contained in the recent OECD report, “Improving the Resolution of Tax Treaty Disputes”, available at  or on request at ctp.contat@oecd.orgSpain in the chairPedro SolbesPedro Solbes, Spain’s deputy prime minister and minister of economy and finance, will chair this year’s annual OECD Ministerial Council Meeting in Paris, 15-16 May. The MCM is the summit of the OECD ministerial calendar; Greece chaired the event in 2006. The main issues to be discussed at the meeting this year include: globalisation, growth and equity; innovation and growth; enlargement of the OECD and relationships with selected non-OECD countries; and trade.For more detail, visit and Plus ça change…“What appears to be an increase in the number of scandals may mean only that accountability and watchdog systems are working well, and that misconduct that was previously quietly overlooked or hidden in bureaucratic secrecy is now publicly exposed.”Sally Washington, “Managing government ethics”, in No.204, February/March 1997©OECD Observer No. 260, March 2007

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