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OECD sees stronger Europe, Japan growth as reform need upheld

Wednesday, March 18, 2015 - 18:25
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Monetary easing and lower oil prices will help the euro area and Japan post stronger growth this year, the Organisation for Economic Cooperation and Development said, while noting central-bank-action must be accompanied by fiscal and structural adjustments to mitigate risks.

[MADRID] Monetary easing and lower oil prices will help the euro area and Japan post stronger growth this year, the Organisation for Economic Cooperation and Development said, while noting central-bank-action must be accompanied by fiscal and structural adjustments to mitigate risks.

The 17-nation euro area will expand 1.4 per cent this year, up from 1.1 per cent in November, the OECD said in its interim economic report on Wednesday. Japan is set for growth of 1 per cent this year, up from 0.8 per cent in its previous forecast.

Despite the increased momentum in the euro area, where the recovery continues to lag the rest of the advanced economies, the OECD noted inflation remains low and domestic demand has been weak since the start of the crisis.

"With the ECB undertaking exceptional policy stimulus and given the considerable progress already made in fiscal consolidation since the crisis, fiscal policy can be more supportive of demand," the Paris-based OECD said in the report.

European Central Bank policy makers unveiled an unprecedented 1.1 trillion euro (S$1.63 trillion) quantitative easing program on Jan 22, pledging to buy 60 billion euros worth of government bonds and other assets a month to fend off a deflationary spiral.

In Japan, growth is set to pick up this year, with falling oil prices and the continuation of monetary easing expected to lift demand. While fuel prices are "likely to push headline inflation lower," the depreciation of the yen and a pickup in nominal demand will lead to stronger core inflation, according to the report.

The growth outlook for the US was unchanged from November at 3.1 per cent, while the UK forecast was trimmed by 0.1 percentage points to 2.6 per cent. The OECD made downward revisions for commodity-exporting countries, including Brazil, where it now expects an economic contraction of 0.5 per cent this year.

In addition to being hit by the low oil price, the Brazilian economy will be restrained by "fiscal and monetary tightening" as well as "growing political uncertainty," it said. Across emerging markets, the OECD expects India to become the fastest growing economy by next year, overtaking China, while noting obstacles in the implementation of structural reforms could effect the "strong current momentum." The OECD noted that, while risks associated with abnormally low interest rates should not deter central-bank-action, mis- pricing and excessive risk-taking driven "by liquidity rather than fundamentals" remain a concern.

"It is remarkable that a growing number of national governments are able to sell medium-term bonds at negative nominal interest rates," it added.

BLOOMBERG