EUROPE NEWS|APRIL 5, 2011, 5:21 A.M. ET
OECD Frets Over Inflation
By GABRIELE PARUSSINI
PARIS—Economic growth in the world's richest countries outside disaster-stricken Japan is gaining strength, the Organization for Economic Cooperation and Development said Tuesday in an upbeat interim assessment, but warned that a rise in commodity prices may push up inflation expectations.
"We are relatively upbeat; it seems that the recovery is gaining strength," OECD Chief Economist Pier Carlo Padoan said in an interview, noting that Group of Seven economies could reach annualized growth of about 3% in the first half of the year. Still, he noted that "we may be at the beginning of second-round effects, with commodity prices feeding into inflation expectations."
The OECD appraisal of the world economy has substantially improved from the twice-yearly forecast the think-tank published in November, which at the time predicted economic growth for its 33 members to reach only 2.3% this year.
The European Central Bank and the Federal Reserve, which have behaved in tandem in the past, have now developed a different outlook, Mr. Padoan said. "The ECB is rightly concerned about inflation expectations becoming less anchored," he added. The divergence in monetary policy seems to be influencing exchange rates, with the euro now "relatively strong vis-a-vis the U.S. dollar," he said.
Economic agents are becoming less confident in the central bank's ability to keep inflation under control, thus risking self-fulfilling expectations for rising prices, and ensuing interest-rate rises. In the euro zone, inflation has been overshooting the ECB's target, set at close to but below 2%, and President Jean-Claude Trichet is widely expected to announce an increase in rates this week.
The U.S. Fed Chairman Ben Bernanke, on the other hand, as recently as April 5 played down inflation threats to the economy, saying that the rise in prices of oil, grains and other global commodities is likely to be temporary and won't translate into a broader inflation problem.
The OECD didn't publish any projection for Japan's economy, arguing that it is too early to estimate the costs of the earthquake and the tsunami that hit the country, coupled with the ongoing nuclear disaster in Fukushima. Growth in the world's third-largest economy might be reduced by between 0.2 and 0.6 percentage point in the first quarter, and by somewhere between 0.5 and 1.4 percentage points in the second quarter, the report said.
"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," the report said. Still, reconstruction efforts are likely to begin relatively quickly, and could begin to outweigh the negative effects on gross domestic product by as early as the third quarter.
The OECD lifted its annualized growth forecast for the second quarter of this year to 3.4% for the U.S., from the 2.5% it had forecast in November. Second-quarter growth predictions have also been upgraded significantly for France—to 2.8% from 1.6% seen previously—and Canada—to 3.8% from 2.6%.
The OECD lowered its second-quarter growth forecast for the U.K.—to 1% from 1.3%—and Italy—to 1.3% from 1.6%. It forecasts growth of 2.3% for Germany, the euro zone's largest economy.
Inflation headline measures have picked up significantly in most major OECD economies, due to rising commodity prices, the report said. "Inflation expectations have been creeping up," it said. Still, underlying rates remain low, reflecting the large excess capacity that remains in labor and product markets.
The OECD pointed out that developed countries should set budget consolidation as their priority, as in most of the 33 countries it monitors public finances remain in distress. A source of uncertainty "stems from sovereign risks in the euro-area periphery, while a more generalized rise in bond yields could materialize in view of the high level of public debt in a wide range of countries," the report said.
Portugal's instability remains the main source of worry, according to Mr. Padoan.
"Portugal has a political problem in terms of government, though we believe that they'll succeed in getting short-term financing in April and June," he said. "It's extremely important that they have a new government acting quickly."
There are both upside and downside risks to the report's projections, the OECD said. Instability in the Middle East and North Africa, as well as an associated possible further increase in oil prices, are the most likely events to act as a drag on economic activity.
The health of nonfinancial corporate balance sheets may counteract this, adding momentum to economic growth via private investment, the report said.
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From http://online.wsj.com/
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