Life begins at 60 for India

This article by Amartya Sen appaeared in Financial Times during the weeek of India's 60th Independence Day in August 2007.

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Pablo Picasso once remarked: "One starts to get young at the age of 60." Something rather like that seems to be happening to India right now, at least on the economic front. There is much more sign of life there today than could be seen when political independence came to the ancient land in 1947, when its strait-laced economy moved at a slow and imperturbable pace - the famous 3 per cent rate of growth. The feebleness of the economic pace was in sharp contrast with the speed of political change in the new republic: India became overnight the first poor country in the world to be a full-scale democracy.

Democracy has indeed flourished well in India since then, with few hiccups and with regular and orderly elections, free and flourishing media, independence of the judiciary and, no less importantly, the willingness of ruling parties to vacate office when defeated in general elections, rather than calling in the army. This would be remarkable enough for any poor country, particularly one the size of India, but it was a much harder task in a land of so many important languages (each with its long and proud history) and such diversity of distinct religions (all placed under a secular but tolerant umbrella). Secularism has been threatened from time to time by sectarian groups, but massive support for secularism across India has asserted itself repeatedly.

On the economic side, India's comparative success is rather new. Some changes came slowly and the growth rate of the economy did move up to 5 per cent a year in the 1980s, which was much faster than in the early decades of independence, not to mention during a century of colonial semi-stagnation. But the decisive moment for the radical changes that have made the Indian economy so dynamic today occurred in the early 1990s, led by reforms introduced by Manmohan Singh, then the newly appointed finance minister (he has been prime minister since 2004, after a period out of office in between). It is useful to ask, in taking a long view of the Indian economy, what changes were needed in India and what really happened over the
period of gradual transformation initiated by the reforms of the early 1990s.

India faced two huge problems of governance. The first one was government over-activity in areas of work in which its presence was overbearing, but where its ability to mess things up was truly gigantic. The so-called "licence Raj" made business initiatives extremely difficult and put them at the mercy of bureaucrats (large and small), thereby powerfully stifling enterprise while nurturing corruption. The going has sometimes been rough but the direction of policy change has been unmistakable from the early 1990s onwards (if still a little slow in many assessments), endorsed even by successor governments run by other political parties.

But India also had a second problem that needed to be addressed urgently. This was the problem of government under-activity in fields in which it could achieve a great deal. There has been a sluggish response to the urgency of remedying the aston- -ishingly under-funded social infra-- structure - for example, the need to build many more schools, hospitals and rural medical centres - and developing a functioning system of accountability, supervision and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rail), which required both governmental and private initiatives.
Large areas of what economists call "public goods" have continued to be under-emphasised.

The radical changes in the 1990s did little to remedy the second problem. If things have begun to change here too (though rather slowly), a part of the credit for ushering in that change must go to India's democratic politics. There is a growing appreciation of the electoral relevance of the unfulfilled basic needs of people (related to schools, healthcare, water supply and other facilities) and there are also pressures generated by better-informed media discussions and by the activities of civil society movements demanding elementary rights.

So where does India stand now, after all this? The economic growth rate, now about 8 per cent (sometimes touching 9 per cent), is, of course, agreeably high, but the sharing of the benefits that flow from this is still remarkably unequal. Poverty rates have fallen, but are nowhere near what could have been achieved had the distributional side got more attention. Some failures are huge, such as continuing undernourishment, particularly in children, and of course the continuing scandal of a quarter of the population all women remaining illiterate in a country with such high-technology achievements based on excellent specialised training and practice. A democratic country can hardly want to maintain a divisiveness that makes it part California and part sub-Saharan Africa.

The unequal distribution of the benefits of economic progress is not unrelated to continuing gaps on the social side, since the human capabilities that make it easy for people to use the new economic opportunities can be vastly enlarged by enhanced public services, such as universal - and good - school education, efficient and accessible public healthcare and good epidemiology. Remedying this calls for much more economic resources and better organised public services.
This is not, however, an argument for considering economic growth to be unimportant. Indeed, quite the contrary, since economic growth also generates government resources that can be powerfully used precisely to expand public services.

Government revenue will grow very fast if it keeps pace with the rapid growth of the economy. In fact, government revenue has persistently grown faster than the growth of gross domestic product: in 2003-04, the economic growth of 6.5 per cent was exceeded by revenue growth of 9.5 per cent and in 2004-05 to 2006-07, the growth rates of 7.5 per cent, 9.0 per cent, and 9.4 per cent have been respectively bettered by the expansion rates of government revenue (in "real terms", that is, corrected for price changes) of 12.5 per cent, 9.7 per cent and 11.2 per cent. Money will continue to flow very rapidly into the government's hands and what is critically important is to use these resources intelligently where they are most needed.

When Picasso said we start to get young as we turn 60, he also expressed the bleak belief that it may be "too late" by then. But changing the neglect of public goods and public services is in no way too late for a country that has already done so much with youthful energy. With a bit more deliberation and purpose, the best may be yet to come.

The writer, who received the 1998 Nobel Prize for economics, is Lamont university professor at Harvard University and former master of Trinity College, Cambridge

US & Global Markets Increasingly Take Separate Paths

As reported in the WSJ By CRAIG KARMIN and JOANNA SLATER

April 23, 2007;

For the first time in years, foreign stocks are behaving less like they are joined at the hip with U.S. shares -- good news for globally minded investors worried that U.S. economic growth may be slowing.

Investors are increasingly preoccupied with the relationship between U.S. and foreign markets, particularly last Thursday, when a 4.5% drop in the Shanghai Composite Index led to declines across Asia. U.S. markets finished flat or slightly lower.

Correlation -- the tendency of two markets to move in tandem -- is decreasing between U.S. and foreign markets partly because economic and earnings growth are diverging.

For years, "as the U.S. market went, so went everything else," says Steven Auth of Federated

Textbook theory suggests that investing abroad helps to diversify a portfolio because overseas stocks are influenced, at least in part, by local economic conditions and interest rates. Therefore, they shouldn't necessarily move the same way as U.S. stocks.

Correlation is measured on a scale of 1 to minus 1. When markets are moving in perfect unison, they have a correlation of "1" and when they move in exact opposite directions, it is "minus 1." (At "0" there is no relationship.)

During the two-year period that ended in February, correlation between U.S. and other developed markets was 0.63, according to ING Asset Management. That is a big decline from 2003 to 2005, when they practically moved in lockstep, at 0.93. (The figures are based on monthly movements in the Standard & Poor's 500-stock index and the Morgan Stanley Capital International EAFE indexes.)

So far this year U.S. markets have held up well. But foreign markets are doing even better. The Dow Jones World Index, excluding the U.S., is up 8.5% this year in dollar terms, compared with 3.9% for the S&P 500.

The problem is that many analysts see economic and corporate-profit growth slowing in the U.S., while still expanding in much of Europe, Japan and the developing world. The U.S. economy has expanded about 2% over the past year. In Europe and Japan, economies are expanding at a 2.5% clip, according to Morgan Stanley. Growth in much of the developing world is poised to continue expanding at a faster pace than in the U.S.

Mr. Auth sees returns on foreign stocks leaving American stocks behind. He says stock prices outside the U.S. look cheaper relative to earnings, and he believes the dollar will continue to weaken, making returns on foreign stocks higher when translated into dollars.

The higher correlations earlier this decade reflected the bursting of the tech-stock bubble, because it dragged down most developed markets, says Leila Heckman of Heckman Global Advisors, a unit of Bear Stearns Asset Management.

In recent years, she says, the U.S. market tended to be less correlated with Japan, Australia, New Zealand and Singapore than it did with European shares.

At the moment, however, Ms. Heckman favors European stocks because she says they will outperform their U.S. counterparts during the near term thanks to cheaper valuations. She notes that high correlation between markets doesn't mean they will demonstrate identical returns, just that they are prone to move in the same direction.

"Correlations have been all over the place historically," Ms. Heckman says. "As long as they're not '1,' and you're investing in different sectors as well as different countries, you can still have some benefits from diversification."

Still, signs that economies around the world might be decoupling from the U.S. are fueling hopes that stock-market performances will diverge even further. While U.S. profit growth in the first quarter is expected to be at the lowest level in five years, "the rest of the world can continue to post solid growth even if U.S. growth remains subpar," J.P. Morgan wrote in a recent report.

Foreign companies may depend less on the American consumer than in the recent past. Morgan Stanley says U.S. exports account for only about 2.9% of Japan's gross domestic product, compared with 4% of GDP in previous decades. Emerging markets, meanwhile, are increasingly selling commodities and other goods to China and India, lessening their historical dependence on the U.S. export market.

In Brazil, a growing middle class and China's demand for iron ore, steel and beef mean that the nation's companies "are fairly well insulated" from a U.S. economic slowdown or dip in the stock market, says Thierry Wizman at Bear Stearns.

Others point to differences in monetary policy as another reason why stock-market performances can diverge: the European Central Bank isn't finished raising interest rates, says Virginie Maisonneuve, head of international equities at Schroders Investment Management in London, while the Federal Reserve appears to be at a standstill.

"You'll continue to see a decoupling" between the U.S. and Europe, she says. And even if diversification proves to be fleeting, some say that shouldn't discourage investment abroad. "The U.S. only represents half of the capitalization of the global equity markets," says Steven Bleiberg, head of global asset allocation at Legg Mason. "Why should you exclude half of your opportunity?"

The Global Economy

In this day and age of Globalization, the below mentioned article is a classic example of how companies in developing countries are becoming increasingly important global players. It also rightly suggest as to how the developed world needs to react to this dynamism by embracing such companies instead of shrugging them off. Also it reaffirms the age-old economic principle "Money has no colour, and investment flows in directions where returns are greatest".

Erect barriers to India and say Tata to dynamism

Salil Tripathi Monday October 23, 2006 Guardian Unlimited

The proposed acquisition of the Anglo-Dutch steelmaker Corus by India's Tata group for over £4bn is unique in several ways.

It is the biggest overseas acquisition by an Indian company and clearly demonstrates their emergence as major players on the global scene.

This year Indian companies have made over 130 acquisitions exceeding $18bn (£9.5bn) in value. Indian firms have invested more overseas than foreign firms have in India this year.
Corus was the result of a union between British Steel and Koninklijke Hoogovens of the Netherlands in 1999, and has not been able to move beyond the middle sector of the high-cost European environment: precisely the kind of company that has become a takeover target.

While the Corus board has accepted the bid, the situation is not yet settled, as market rumours persist that the Brazilian steelmaker CSN, which has shown interest in Corus in the past, may step in with a higher bid. Nonetheless it reinforces the trend towards consolidation in the steel industry.

Of importance to Britain's European neighbours is the maturity with which the British government responded to the takeover, unlike the reaction of France and Luxembourg, when Mittal Steel took over Arcelor earlier this year.

For Tata, this is a big deal: Tata is a diversified conglomerate with interests ranging from steel, hotels, tea, telecom, automobiles, textiles, chemicals, information technology, and power, and Tata Steel is the biggest private sector steelmaker in India. If the deal goes ahead, it will catapult Tata from the world's 56th biggest steelmaker to the fifth largest.

Not only is Tata a well-known brand in India, it is a group most investment bankers instinctively respect, because its corporate governance and ethical standards are high. Like almost every business group, Tata has been touched by controversies, but observers of the Indian corporate scene say those were exceptions.

Tata's labour relations policies have often been superior to prevailing legal standards, and some of its practices preceded some of the conventions of the International Labour Organisation.

Tata now controls Tetley Tea and is the largest seller of whole coffee beans in the US. It recently acquired a 30% stake in Glaceau, an American company that makes "enhanced" water, flavoured with fruit and containing added vitamins.

Its software arm, Tata Consultancy Services, may lack the glamour of Bangalore-based Infosys and Wipro, but it raked in more export revenues than the other two in 2005. Tata's car, the Indica, was marketed in Britain as the City Rover.

It is conceivable that the Tata group's businesses touch some aspect of every Indian's life at least once in a week, if not daily.

Unruffled and pragmatic

What has been notable is the pragmatic, unruffled way the British government has reacted to the Tata bid. When Mittal Steel sought to take over Arcelor, the bid became a major political issue almost immediately, with prominent European politicians and businessmen predicting the end of European civilisation as we know it.

In contrast, in London, the government shrugged off questions about the Tata bid, which is the way it should be. Money has no colour, and investment flows in directions where returns are greatest.

Those who fear economic globalisation will have genuine worries. What if Tata closes its plants here and ships production to India? Will this lead to a complete hollowing out of Britain's industrial base?

The rational response to such questions is this: whether or not an overseas investor takes a stake in a local firm, if the local firm is not competitive in the global market, it will have to readjust.

At a broader level, this is a Europe-wide concern. When Chinese manufacturers are able to make clothes and shoes at substantially lower costs, and if they meet the quality standard European consumers take for granted, should Europe build a fence around itself, and force its consumers to pay more? Or should it think of ways in which its labour market can be retrained and redeployed, so that costs fall for everyone?

When an investor snaps up a British company, essentially it means he sees value in a British asset, and wants to put his good money where his mouth is. Inevitably, a change in ownership can lead to some changes: some jobs could get lost, and workers would need retraining.

Avoiding that tough choice will not make Britain more competitive. That will keep costs high in Britain, and make it harder for foreigners to buy British-made products. If Britain ends up selling less abroad, it will have less money to buy products made abroad. That's a vicious, not a virtuous circle.

Writing in the Observer earlier this year, Will Hutton said: "Britain is being sold off at a rate unprecedented in modern times. If (all) foreign takeover bids ... go through, airports, ships, banks, gas pipelines, stock exchanges, chemical plants and glass factories will fall into foreign ownership. Yet there is no debate; scarcely an eyebrow is raised. In any other country, there would be uproar.... British staff, British assets and British brands, built up over decades, are to become part of somebody else's story. And nobody gives a damn."

Let us be grateful for that. It tells us why Britain remains more dynamic than many other economies, and reflects its instinctive, uncanny understanding of the fluid nature of capital, letting investments seek the highest return. It also explains why the British economy is more flexible, and often outperforms European economies of a similar size.

Salil Tripathi is a former regional economics correspondent at the Far Eastern Economic Review in Singapore. In his undergraduate years in India, he was a Dorab Tata scholar

Economic Perfection

Interesting and thorough analysis of the current state of the economic cycle.

By Daniel Gross August 22 2006: 5:35 AM EDT Fortune Magazine

At 2 p.m. on Aug. 8, the Federal Reserve declared a cease-fire in its long-running rate-hike campaign. A week later the government reported benign inflation figures for July: The producer price index rose a meager 0.1 percent, while the core consumer price index was up just 0.2 percent.

Investors and Fed watchers concluded that inflation is under control. And newly confident in the sound judgment of Federal Reserve chairman Ben Bernanke, they began spinning happy scenarios of a soft landing.

But less noticed on Aug. 8 was the first dissent of the Bernanke era: Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, voted for a 25-basis-point increase. He may have been reacting to a bit of news released just days before - one that may indicate we're in for a bumpy macroeconomic ride. The Bureau of Labor Statistics reported that in the second quarter productivity growth came to a screeching halt, falling to 1.1 percent from 4.3 percent in the first quarter.

Perhaps even more ominous - since quarterly productivity numbers tend to jump around a lot - the Commerce Department in late July revised downward its estimates of productivity growth from 2003 to 2005.

Why does productivity matter? It measures an economy's ability to do more with the same amount of labor and is the best indicator of how fast it can grow without spurring inflation.

Until recently productivity growth was highly cyclical: It would rise sharply at the beginning of an expansion and then slow as labor markets tightened and workers demanded greater compensation. That changed in the 1990s. From the early 1970s until 1995, nonfarm business productivity growth averaged a meager 1.5 percent per year. But between 1995 and 2001, even as the 1990s-era expansion ripened, productivity grew at a remarkable rate: about 2.5 percent per year.

Former Federal Reserve chairman Alan Greenspan explained this anomaly by pointing to a virtuous cycle fueled by information technology. IT investments boosted productivity, which boosted corporate profits, which led to more IT investments, and so on, leading to a nirvana of high growth and low inflation.

This virtuous cycle survived the dot-com meltdown, as productivity growth remained strong in the post-2001 years. In June, speaking at his alma mater, MIT, Bernanke noted that research "suggests that the current productivity revival still has some legs."

Vicious reinforcement

But Bernanke may face a much different inflation vista than Greenspan did. In the 1990s, Europe, Asia, and America took turns growing strongly, so we never had a pervasive global push on prices, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute. Now the world's largest economies have all been expanding for several years, which is pushing up prices for commodities. (Hello, inflation!)

If lower productivity and higher inflation amplify each other - as higher productivity and lower inflation did in the 1990s - we face the risk of a bizarro virtuous circle, says Achuthan: a vicious reinforcement, in which lower productivity drives inflation higher, which in turn drives productivity lower.

The most recent productivity release showed unit labor costs rose 4.2 percent in the second quarter of 2006, up from 2.5 percent in the first quarter.
"These are traditional markers of a cyclical inflation upswing," says Allen Sinai, chief global economist at Decision Economics.

Bernanke himself may be more concerned than he lets on. The Federal Open Market Committee's Delphic communiqué for June 29 contained this sentence: "Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained."

In the Aug. 8 missive, that reassuring statement was nowhere to be found.

How the Forecasters Fared

here is a reprot card of the forecasters.

HOW THEY FARED Economist Allen Sinai took the top rank among forecasters for the first half of 2006. See details in a related article. Forecasts from survey conducted June 9-26, 2006. Actual numbers as of June 2006.		GDP : Avg. Q1 2006 For: Avg. Q1 2006 Closest forecasts: Gene Huang (4.7%) David Lareah (4.7%)		CPI : May 2006 For: May 2006 Closest forecast: Michael P. Niemira (4.3%)		Jobless Rate : May 2006 For: May 2006 Closest forecast: James F. Smith (4.6%) blank
Three-Month Treasury Bill : June 30, 2006 For: June 30, 2006 Closest forecast: Lou Crandall (5.00%) J. Dewey Daane (5.00%) D. Malpass/J. Ryding (5.00%)	10-Year Treasury Note : June 30, 2006 For: June 30, 2006 Closest forecast: Allen Sinai (5.14%) blank blank	Dollar vs. Euro (in dollars) : June 30, 2006 For: June 30, 2006 Closest forecast: Nariman Behravesh (1.26) John Silvia (1.26) Allen Sinai (1.26)	Dollar vs. Yen : IJune 30, 2006 For: June 30, 2006 Closest forecast: Four-way tie (¥114)

US Inflation & Interest Rates reaching new highs

An interesting and postitive article from the Journal on US Economy, Inflation & Interest Rates. Looks like we'll see a lot more of Bernanke in action.

By MARK WHITEHOUSE

July 4, 2006 6:13 p.m.

In recent months, U.S. consumers and investors alike have suffered unpleasant surprises as prices on everything from gasoline to apartment rents have jumped. But the worst may be yet to come, says the top-ranked economist in The Wall Street Journal's latest forecasting survey.

For several years, Allen Sinai, chief global economist at Boston-based consulting firm Decision Economics, has argued that the current expansion -- with global demand pushing up oil prices -- looks a lot more like the classic business cycles of the 1970s and 1980s than the exceptional one of the 1990s, when various factors -- from the peace dividend to globalization -- helped keep inflation in check. In December that conviction led Mr. Sinai to forecast that consumer prices would rise sharply in the first half of 2006 and wind up 3.5% higher in May 2006 than a year earlier.

The actual year-over-year inflation number hit 4.2% as of May, higher than any of the 56 economists in the survey had imagined, making Mr. Sinai's aggressive forecast among the most accurate. "Inflation sneaks up on you like a cancer," says Mr. Sinai. "When you begin to see signs of it, it's already in the system and in motion." His guess that the bond market would react to higher inflation by pushing the yield on the 10-year Treasury note up to 5.14% by June 30 -- the actual number was 5.15% -- clinched him the No. 1 spot.

Now, Mr. Sinai thinks inflation will likely begin to feed on itself, as workers and suppliers demand higher wages and input prices, and companies pass those cost increases on to consumers. As a result, he expects the Federal Reserve to slam harder on the brakes, increasing its target for short-term-interests from the current 5.25% to 6.25% by mid-2007, a level that no other economists think likely, and that many believe would be high enough to trigger a recession.

Mr. Sinai, however, says not to worry. He thinks higher interest rates won't seriously crimp companies' ability to get funds for investment, allowing the economy to expand well into the election year of 2008. "All things considered, the U.S. and global economies are doing quite well," he says. He expects growth in U.S. real gross domestic product to average almost 3% in the second half and about 2.7% in the first half of 2007.

Inflation and GDP growth proved the two toughest targets to hit among forecasters who participated in the December survey, and consequently became the most-important factors in the rankings. A high estimate of first-quarter GDP growth -- 4.7% compared with an actual 5.6% -- won second place for Gene Huang, chief economist at FedEx Corp. Maria Fiorini Ramirez of the eponymous consulting firm, Peter Hooper and Joseph LaVorgna of Deutsche Bank Securities, and Mickey Levy of Bank of America Corp. made the top five largely by getting in the ballpark on inflation and GDP.

Yield Curve & the Fed Rates

Simple yet optimistic view of the US economy

By Chris Isidore, CNN Money senior writer.

May 24, 2006: 3:35 PM EDT

NEW YORK (CNNMoney.com) - Three of the scariest words in economics used to be "inverted yield curve."

The condition, which occurs when long-term interest rates are lower than short-term rates in the Treasury bond market, was once seen as a pretty clear signal of a recession ahead.

And while that's changed - many economists now say an inversion is more a sign of a slowing economy than a coming recession - the action in the bond market Wednesday morning had some experts saying the Federal Reserve may finally be forced to pause in its rate-hiking campaign so as not to upset financial markets.

"It's not among the top five things they're reading, but I don't think they're ignoring it totally," said Tom Schlesinger, executive director Financial Markets Center, a research firm that follows the Fed closely.

The inversion early Wednesday was different than the inversion that occurred late last year and early this year, when the 10-year Treasury yield fell below the yield on shorter-term Treasury securities.

Wednesday's inversion came as the 10-year yield fell briefly below the fed funds rate, the Fed's short-term rate target, currently 5 percent. It was the first time that's happened since April 2001, the last time the country was in a recession.

The 10-year yield dipped briefly below the fed funds rate Wednesday morning after a report showed a big drop in demand in April for cars, refrigerators and other big-ticket items known as durable goods.

But when a report on new home sales came in above forecasts 90 minutes later, the 10-year Treasury yield edged back above the 5 percent level.

"Ever since the Fed said decisions on future rate hikes would be data dependant, all of a sudden all the numbers matter," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

And even if Fed officials have downplayed the threat of an inverted curve, some economists said the Fed will be reluctant to get too far ahead of where bond investors are betting rates will go.

Last winter, the Fed could keep raising rates without pushing the fed funds rate past the 10-year yield.

But in recent comments, Fed Chairman Ben Bernanke repeated the view expressed by his predecessor Alan Greenspan that an inverted yield curve is no longer a good indicator of a recession ahead.

"In previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint," Bernanke said in a speech in March. "This time, both short- and long-term interest rates -- in nominal and real terms -- are relatively low by historical standards."

Ian McCulley, analyst with Grant's Interest Rate Observer, a financial newsletter, said he doesn't think the Fed will feel constrained by the recent moves in the bond market.

"The curve (between the 3-month and 10-year) was inverted or flat earlier this year and they tightened into that," he said.

The narrow gap between long-term and short-term rates is something Greenspan famously referred to as a conundrum, and the flat or inverted yield curve seen Wednesday is just the latest example of that puzzle, experts said.

Even if there was more of a gap until recently, it was still narrow by historic standards, said Schlesinger. "I'm not sure how much the conundrum ever went away," he said.

It's also true that the inversion Wednesday was short-lived and relatively narrow. Some of the pre-recession inversions in the past were far more pronounced.

For example the gap between the 10-year yield and the fed funds rate were inverted for nearly 11 months and the gap reached 1.5 percentage points in January 2001, just before the Fed started cutting rates.

The recession that started in late 2000 lasted until the fall of 2001.

Still, an inverted yield curve is not something that can be ignored, the experts said.

"I think it would be healthy to be concerned, given the track record of the curve being a warning sign," said Schlesinger. "It's important not to be trapped by past patterns. But it (the inverted yield curve) does raise a question about how far the Fed has to tighten."

Giddis and Schlesinger both said they're skeptical that an inverted yield curve now will mean a recession later this year

More likely? It's signaling slower economic growth ahead. And maybe an end to Fed rate hikes sooner rather than later.

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)