Economic outlook: Gradual rebalancing

Press Briefing by Jean-Philippe Cotis OECD Chief Economist 5 September, 2006
OECD Observer

Some gradual rebalancing of economic growth is expected between the US and Europe in the second half of 2006, according to the OECD’s interim assessment. Chief Economist Jean-Philippe Cotis explains that after the catch-up in activity earlier in the year, growth is likely to slow in Europe while expansion in Japan and the US regains momentum.

As projected in the May 2006 OECD Economic Outlook, activity in the OECD area as a whole is set to grow around potential during the second half of this year, with some gradual rebalancing between the two sides of the Atlantic. In this context, the recent data for the first half of 2006, indicating a much stronger than expected performance in Europe and a significantly weaker one in the United States and Japan, should not be merely extrapolated going forward.

Indeed, following this catch-up, growth is likely to slow somewhat in Europe whilst the US and Japanese expansions regain some momentum. As concerns inflation, price stability is still some way off in the United States and, in the opposite direction, in Japan.

The risks surrounding this scenario continue to include the evolution of oil prices, which oscillated between $70 and close to $80 during the summer. Another prominent set of risks relates to long-term interest rates and real estate, against the backdrop of cooling housing markets in North America.

The US economy is running at around full capacity. In the second quarter, investment weakened, dragged down by the homebuilding sector. Household consumption slowed less and has in fact tended to accelerate in recent months, consistent with a pick-up in compensation, and so have exports, pointing to robust GDP growth in the third quarter. Unemployment has edged up since spring but remains low. In the United Kingdom, growth continues to be resilient at around potential.

In Japan, momentum is driven by business fixed investment and household consumption. Corporate sentiment is holding up well, underpinned by strong profits and orders. Consumption is buoyed by employment creation and rising compensation. As a result, the expansion is on course to become the longest in half a century.

In the euro area, activity accelerated in the second quarter, partly catching up with upbeat business confidence indicators. Several transitory factors helped, notably the soccer World Cup and time-bound subsidies in the construction sector in Germany. Domestic demand in the euro area benefits from the pickup in employment growth in the two largest economies, and area–wide unemployment has fallen to below 8% of the labour force for the first time since 2001. Given the stronger-than-expected momentum in the first half, year-average GDP growth is now slated to reach 2.7%.

With most measures of inflation edging up, central banks across the G7 countries and beyond have lifted their policy rates since spring, but they face very different stages of the economic and interest rate cycles. In the United States, the Federal Reserve paused in August but further tightening may turn out to be warranted if activity and prices do not slow down over the next few months, as past interest rate hikes and housing market softening work their way through. In Japan, there is a strong case for waiting before further hiking the policy rate until the new series of core inflation (excluding energy and food) is firmly in positive territory. In the euro area, the recovery now seems sufficiently robust for a return towards a neutral monetary stance, but gradually so, since unit labour costs remain well in check.

On the public finance front, dynamic activity and rising asset prices have contributed to positive revenue surprises. As a result, the fiscal deficit in the United States and in a number of other OECD countries should come in below what had been budgeted. In particular, in several euro area members, the general government deficit will pass under the 3% of GDP mark. In general, however, the extra receipts should not be spent, since the pace of fiscal consolidation during this cyclical recovery has so far failed to live up to the public finance challenges stemming from population ageing and other medium-run pressures.

©OECD Observer, September 2006




Economic data

GDP growth: +0.6% Q3 2017 year-on-year
Consumer price inflation: 2.3% Sept 2017 annual
Trade: +1.4% exp, +1.7% imp, Q2 2017
Unemployment: 5.7% Sept 2017
Last update: 14 Nov 2017

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Papers show “past coming back to haunt us”: OECD Secretary-General Angel Gurria tells Sky News that the so-called "Paradise Papers" show a past coming back to haunt us, but one which is now being dismantled. Please watch the video.
  • The annual OECD Eurasia Week takes place in Almaty, Kazakhstan 23-25 October. Writing in The Astana Times, OECD Secretary-General Angel Gurría urges Eurasia countries to stay the course on openness and international integration, which has brought prosperity but also disillusionment, notably regarding inequality. The OECD is working with this key region, and Mr Gurría urges Eurasia to focus on human capital and innovation to enhance productivity and people’s well-being. Read more.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017