PARIS (MNI) – The OECD on Tuesday said growth prospects in most of
the G7 economies, except Japan, had improved of late but warned that
monetary authorities in some countries may need to take action to hold
down inflation expectations.

Following is the text accompanying the organisation’s interim G7
forecasts ahead of its more detailed Economic Outlook to be released in
May:

1. The news has of course been dominated by the disaster in Japan
following the Great East Japan earthquake and tsunami. We express our
deep sorrow at the enormous loss of life and offer our condolences to
those affected by this tragedy. The full cost of the disaster is not yet
known, but the authorities preliminary estimate is that the loss of
physical capital amounted to 3.3% to 5.2% of annual GDP. It is
impossible at this point to assess the effect on economic growth, and
therefore this interim outlook contains no projections for Japan. As a
first estimate, growth in Japan might be reduced between 0.2 and 0.6
percentage points (non-annualised rates) in the first quarter and by
somewhere between 0.5 and 1.4 percentage points in the second quarter.
This includes the impact of the disaster on production in the areas hit
directly, the rationing of power, the hit to confidence and supply chain
disruptions. Reconstruction efforts are likely to begin relatively
quickly, and these could begin to outweigh the negative effects on GDP
by as early as the third quarter.

2. Against this background and according to the OECD short-term
forecasting models, growth in the G7 economies outside Japan could rise
to an annualised rate of about 3% in the first half of the year (see
table opposite). However, although labour market conditions have been
improving somewhat in most OECD countries in recent months, the
OECD-wide unemployment rate remains over 2 percentage points higher than
at the onset of the crisis. As regards inflation, headline measures have
picked up significantly in most major OECD economies due to rising
commodity prices and, in some countries, price-level adjustments
following increases in indirect tax and administered prices. Moreover,
inflation expectations have been creeping up. Nevertheless, underlying
inflation rates are still low reflecting the large excess capacity that
remains in labour and product markets. Inflationary pressures are
stronger in some of the large emerging-market economies, prompting a
tightening of monetary policy.

3. Aside from the situation in Japan, there are both downside and
upside risks:

– Instability in the Middle East and North Africa and an associated
possible further increase in oil prices could act as a drag on economic
activity in the near term. Another source of uncertainty stems from
sovereign risks in the euro area periphery, while a more generalised
rise in bond yields could materialise in view of the high level of
public debt in a wide range of countries. As well, housing markets in
several countries show signs of continued weakness, with bank exposures
possibly entailing financial fragilities.

– As for strengths, non-financial corporate balance sheets look
very healthy, and this could add momentum to economic growth via private
investment. Moreover, in spite of still high unemployment in many
countries, developments in labour markets look better than expected a
few months ago, which could have a favourable impact on private
consumption. More generally, the underlying momentum in economic growth
in most countries appears stronger than in earlier projections even if,
at least in Europe, this has been masked by a noticeable negative impact
of severe weather conditions in the final quarter of last year.

4. Considering the balance of strengths and fragilities discussed
above, and with financial conditions improving across the board, it
seems likely that the recovery is becoming self-sustained. Meanwhile, in
some OECD countries monetary policy will need to deal with a risk that
inflation expectations may become un-anchored. Public finances remain in
distress in most OECD countries. The priority is therefore to
consolidate budgets and establish credible and growth-friendly
medium-term plans. To facilitate the tasks of monetary and fiscal
authorities, pro-growth structural reforms should be implemented.
Finally, OECD analysis has shown that a combination of well-targeted
macroeconomic and structural policies could achieve a sustained
reduction in the still wide global imbalances, as well as contribute to
fiscal consolidation.

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