World Economy Rising

Nice detail of as to how interlaced the world economy is.

By Brian Love, European Economics Correspondent

PARIS (Reuters) - Global economic growth is speeding up and has spread to weak spots such as Japan and Europe without sparking a surge in inflation so far, the OECD said on Tuesday.

Chief Economist Jean-Philippe Cotis voiced concern, however, over high oil and commodity prices, which the OECD said were likely to stay high because of strong Asian demand despite a sell-off in markets in recent days.

Growth in the 30 mostly industrialized economies of the OECD is forecast to expand 3.1 percent overall this year, up from 2.8 percent in 2005, the Organization for Economic Cooperation and Development said in its Economic Outlook, a twice-yearly report.

"The ongoing expansion is entering its fifth year," it said.

"Notwithstanding the headwinds from high and volatile energy prices, it is projected to continue and even broaden this year and next."

That echoed the International Monetary Fund, which in March forecast worldwide economic growth of 4.9 percent in 2006, the best in 30 years barring an exceptional year in 2004.

Like the IMF, the Paris-based OECD said that current account imbalances -- surpluses in China and Japan and deficits in the United States -- posed a continuing and perhaps mounting threat.

"A brutal unfolding of such imbalances would hurt the world economy," chief economist Jean-Philippe Cotis said.

The OECD forecast U.S. growth of 3.6 percent in 2006 and 3.1 percent in 2007 after 3.5 percent in 2005.

For the euro zone, it predicted GDP growth of 2.2 percent this year and 2.1 percent in 2007 after 1.4 percent this year.

For Japan it forecast 2.8 percent growth this year and 2.2 percent in 2007, from 2.7 percent in 2005.

CHINESE INFLATION REMEDY

The OECD made a first attempt to quantify how globalization and cheap Chinese and broader Asian exports affect prices and it reported a greater inflation-limiting impact in Europe than in the United States.

From 2001 to 2005, imports from China and other Asian countries knocked the U.S. rate of inflation down by 0.1 percentage points each year, and trimmed Europe's inflation rate by nearly 0.3 percentage points a year.

Chinese exports have risen four-fold in 15 years.

But Cotis said it remained to be seen whether this benefit was not more than offset by insatiable demand for oil, metals and other commodities in China and other rapidly developing economies of Asia, and the resulting upward pressure on prices.

"Experience over the past three years suggests commodity price pressures may significantly outweigh the disinflationary influence of low-cost manufacturing imports," Cotis said.

The OECD report, which assumes oil prices will stay around $70 a barrel this year and next, predicted a rise in the overall inflation rate for the OECD region to 2.2 percent this year but a retreat the year after to 2.0 percent, where it stood in 2005.

Cotis was sanguine about the recent bout of investor nerves, which drove some stock markets to five-month lows and triggered a run on metals from 25-year records in some cases over the past couple of weeks, with a partial recovery on Tuesday.

"If it was a mistake to be over-optimistic then, it would be a mistake to be over-worried now," he said. Markets had enjoyed years of calm and recent gyrations needed to be put into perspective, he said.

BUBBLE, BUBBLE...

The OECD report, however, did voice concern about what the organization sees as more serious risks for the longer term.

It said a risk of housing market downturns had become more pronounced in the United States, France and Spain but depended partly on future interest rate developments.

It echoed the view that monetary policy was getting more restrictive after years of super-cheap lending but said it would be unwise to rush into more rate rises in the 12-nation euro zone, and that the Japanese central bank should not raise rates until next year.

The OECD predicted a further quarter-point rise in the key U.S. policy rate to 5.25 percent, then a pause followed by a possible cut of the same size a year from now.

"A light 'tap on the brakes' seems necessary to keep the economy in balance," the OECD said.

It advised the Bank of Japan to keep rates at close to zero until the end of 2006 while awaiting proof that Japan's totally different problem of deflation was a thing of the past, suggesting a rise to 1 percent by end-2007 could follow.

It reserved its most eye-catching advice for the ECB, which the financial markets believe is itching to raise its key euro zone rate from 2.5 percent as early as next month.

The OECD assumed the ECB would raise rates by another 1.25 percentage points gradually, but only from later this year, once hard economic data had confirmed a full-blown recovery.

Chief economist Cotis said the ECB should hold fire until October, after second-quarter GDP data would presumably have confirmed a recovery which is so far looking stronger in "soft" confidence surveys than in "hard" data such as GDP figures.

IMF chief Rodrigo Rato said the same thing in Vienna on Monday, remarking: "We see the need for monetary policy to be very aware in Europe of the first stage of the recovery."

Klaus Liebscher, Austrian member of the rate-setting council of the ECB, offered a sharp riposte.

"I think every institution should care about its own duties. Interest rate policy is done by the ECB. And we have to make our decisions based on our own findings," he told Reuters when asked about the OECD's advice during a conference in Vienna.

As the OECD report was released, Germany published some more positive news, saying long-flagging domestic consumption had picked up and contributed significantly to first quarter growth.

The OECD also highlighted the strong performance of some of the countries which are not part of its membership.

Brazil is set to pick up after a disappointing 2005 compared to other emerging market economies, the OECD said, predicting growth rising to 3.8 percent from 2.3 percent in 2005.

China, now the fourth largest economy in the world, is predicted by the OECD to grow 9.7 percent this year.

India is set to secure economic growth of 7.5 percent, while oil-rich Russia can expect 6.2 percent, the OECD said.

(Additional reporting Anna Willard in Paris, David Milliken in Frankfurt, Boris Groendahl and Stella Dawson in Vienna)