OECD Economic Outlook

Frequency :
Semiannual
ISSN :
1609-7408 (online)
ISSN :
0474-5574 (print)
DOI :
10.1787/16097408
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The OECD Economic Outlook is the OECD’s twice-yearly analysis of the major economic trends and prospects for the next two years.  Prepared by the OECD Economics Department, the Outlook puts forward a consistent set of projections for output, employment, prices and current balances based on a review of each member country and of the induced effect on each of them on international developments.

Coverage is provided for all OECD member countries as well as for selected non-member countries. Each issue includes a general assessment, chapters summarizing developments and providing projections for each individual country, three to five chapters on topics of current interest such as housing, and an extensive statistical annex with a wide variety of variables including debt. Subscribers to the print edition also have access to an online edition, published on internet six to eight weeks prior to the release of the print edition, and now available from Issue 1 from 1967 onwards.

Also available in: French, German
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OECD Economic Outlook, Volume 2004 Issue 1

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Author(s):
OECD
Publication Date :
10 May 2004
Pages :
288
ISBN :
9789264016156 (PDF) ; 9789264016132 (print)
DOI :
10.1787/eco_outlook-v2004-1-en

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OECD's June 2004 assessment of economic developments and prospects.  In addition to the regular economic assessments and statistical information, this issue includes articles examining whether housing and mortgage market arrangements explain different degrees of economic resilience shown by OECD economies, through what mechanisms the US external deficit could adjust, to what extent stock market gyrations and one-off measures distort traditional measures of the fiscal stance, and how structural reform could enhance income convergence in Central European countries.

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    Towards a Shared Recovery

    With the slump of business investment now well over, the world economy is experiencing a strong and sustainable recovery. Asia remains buoyant, with China close to overheating and Japan enjoying a much stronger and broader recovery than expected. In the United States, the economy has already been growing well above potential and other English-speaking countries, which took part only marginally in the past slowdown, are cruising ahead...

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    General Assessment of the Macroeconomic Situation

    This volume analyses the major trends that will mark the next two years. It provides in depth coverage of the main short-term economic challenges as well as the measures required to foster growth in each member country. Forthcoming developments in major non-OECD economies are also evaluated in detail...

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      United States

      The expansion is now firmly established across most sectors of the economy, helped by continued stimulus from fiscal and monetary policies. Increases in disposable income induced by tax refunds and wealth gains are providing ongoing support for consumption. The strong growth of productivity and profits bodes well for future investment and output. Further sustained weakness in the labour market would, however, pose a downward risk to household income and consumption. With inflation at the lower end of desirable levels, monetary policy has remained supportive, but interest rates will need to be raised as the slack in product and labour markets dissipates. Government finances have deteriorated substantially as a result of cyclical developments, tax cuts and higher spending, especially on defence and homeland security. The large deficits projected over the coming years underline the need to adjust both tax and spending levels with a view to balancing the budget so as to raise national saving and prepare for impending demographic pressures. This would also help to lessen the external imbalance...

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      Japan

      The economic expansion gained momentum in late 2003, thanks to an acceleration of business investment and exports and some strengthening of private consumption. The pick-up in world trade and steady increases in domestic demand, buoyed by some improvement in the labour market, are expected to help sustain growth near 3 per cent through 2005. Such growth would make this Japan’s longest upturn since the 1980s and help bring deflation to an end. However, the economy faces significant headwinds from the continued fall in land prices and bank lending. Monetary policy should continue the quantitative easing strategy until positive inflation is achieved on a sustained basis and the risk of deflation becomes negligible. While the expected decline in the budget deficit in 2004 and 2005 is welcome, a more ambitious medium-term approach is needed to reach the government’s target of a primary budget surplus by the early 2010s. Progress in reducing the non-performing loan ratio of the major banks should be continued, accompanied by an acceleration of a broad structural reform programme to revitalise business activity...

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      Euro Area

      The economy is past the turning point, but the strong euro is weighting on the recovery.Growth is projected to firm from ½ per cent in 2003 to 1½ and 2½ per cent in 2004 and 2005. This pick up is underpinned by the strong recovery in world trade, improving corporate balance sheets and a supportive stance of monetary policy. Further exchange rate appreciation and persistently poor household sentiment could hamper the recovery. The unemployment rate is expected to peak at 8¾ per cent in 2004. Inflation is likely to ease to about 1½ per cent in 2004. With the output gap still wideningand on the basis of these inflation projections some further monetary easing would be warranted. There is no leeway for fiscal policy to provide growth impetus in view of the need for fiscal consolidation in many countries. To raise resilience in response to adverse shocks and to stimulate economic growth on a sustainable basis, structural reforms are essential. These should focus on creating a truly integrated European market, increasing business dynamism and pushing ahead with labour market reforms....

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      Germany

      The economy is recovering from three years of stagnation during which domestic demand eclined by about 2 per cent. Investment activity, in particular, firmed in the second half of 2003 and destocking slowed considerably. Growth is projected to pick up further in 2004, driven by strengthening exports. As the upswing broadens in 2005, GDP is likely to grow at around 2 per cent, which would be above potential. The general government deficit is likely to remain above 3½ per cent of GDP this year but to fall back to 3.1 per cent in 2005. Significant progress has been made in structural reform. Legislated measures to be phased in comprise, inter alia, an easing of employment protection, a reform of unemployment related benefits to improve job search incentives and some easing of requirements for setting up handicraft business. While steps have been taken to curb long-term expenditure increases, further expenditure reforms are required to reduce the structural deficit in a sustainable way...

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      France

      GDP accelerated in the second half of 2003, reflecting strong government consumption and rising investment. Accelerating exports, which initiated the recovery, were offset by very rapid imports in the fourth quarter. Unemployment appears to have stabilised at just below 10 per cent of the labour force and employment is now growing. Meanwhile administrative price hikes have contributed to a pick-up in inflation. Overall, economic activity is projected to continue expanding, allowing the output gap to begin closing in 2005. To achieve the fiscal consolidation planned for 2004 and 2005 (notably reducing the deficit below 3 per cent of GDP), substantial efforts beyond those so far announced will be required. A planned reform of the public health insurance system could contribute to a more rapid fiscal consolidation, but its impact on spending is likely to be felt principally over the longer term. Efforts to improve the functioning of labour markets should bolster employment growth and would also help to increase revenues and reduce public expenditure....

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      Italy

      Activity stagnated in late 2003 and the beginning of 2004, but stronger growth is expected from mid-2004 and into 2005 as world demand accelerates and uncertainties due to domestic corporate governance problems recede. Employment growth has moderated since mid-2003 but should pick up again as the recovery gathers momentum. Inflation should drop below 2 per cent during the first half of 2004, responding to a widening output gap, before rising again during the ensuing recovery. The public-sector deficit was around 2½ per cent of GDP in 2003. On present policies, slow economic activity and high government spending -- together with the ending of one-off measures -- could push it to around 3 per cent of GDP in 2004 and 4 per cent in 2005. Further restrictive budgetary measures are thus needed. Faster inflation convergence towards the euro area would call for lower unit labour cost increases and more competition in product markets...

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      United Kingdom

      Robust growth will continue in 2004, leading to a closing of the output gap. With the housing market picking up again and the labour market strong, private consumption is likely to expand vigorously. Instability stemming from the housing market remains a risk. The recent appreciation of sterling will damp inflation in the short run, but underlying price pressures are building up. A continuation of the recent gradual tightening of monetary policy should ensure that growth declines towards the trend rate by the end of 2005 and that inflation will not overshoot the 2 per cent target. The government deficit exceeded 3 per cent of GDP in 2003, and a slowdown in spending or a rise in taxation may be required to ensure that the "golden rule" can be comfortably met over the next cycle...

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      Canada

      The economy accelerated in the last quarter of 2003 as export volumes rebounded and inventories rose, but final domestic demand was weak. With lower import prices and the end of special factors, inflation has fallen below the central bank’s target range. Going forward, the expected world trade recovery, together with a strengthening of internal demand, should help output growth return to above its potential rate later this year while inflation should remain subdued. Given low inflation and doubts as to the strength of the rebound, the Bank of Canada has eased monetary policy three times this year. With planned budgetary restraint, the current policy mix appears appropriate, as long as vigilance is exercised over expenditure. However, the monetary stimulus will need to be withdrawn once robust economic growth is in place. Fiscal policy should continue to focus on maintaining the downward trend in the debt burden before ageing pressures accumulate...

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      Australia

      The economy has rebounded strongly from its mid-2003 weakening, driven by private expenditure and an upturn in exports. Domestic demand may slow in 2004 and 2005, but the strengthening world economy and the breaking drought should boost exports and raise GDP growth, despite the strong Australian dollar. Although capacity utilisation is high and unemployment is at a record low, wage moderation, improved labour productivity and the currency appreciation should keep inflation under control. The favourable economic outlook should permit a more neutral setting of monetary policy, to lock in price stability. Fiscal policy should remain geared to preserving a small budget surplus, which would help to maintain financial market confidence and keep long-term interest rates in check...

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      Austria

      Output is expected to accelerate modestly, in line with the recovery in the euro area, which would not be enough for unemployment to fall significantly. The economy will benefit from a positive fiscal stimulus and strong growth in neighbouring accession countries. Tax reductions will raise the structural deficit in 2005, notwithstanding ongoing efforts to reduce public sector spendin . Further reductions in government outlays are necessary in view of relatively high debt levels and remaining ageing-related spending commitments. Further steps to improve incentives to work among older workers and women would help to offset the adverse longer-term economic effects of ageing...

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      Belgium

      Economic growth picked up sharply in the second half of 2003 and should reach 2½ per cent by 2005 as the international economy recovers and business investment strengthens. Unemployment is likely to peak in 2004 and inflation to fall to below 1½ per cent in 2005, reflecting low increases in unit labour costs. The government needs to slow the growth in primary expenditures so as to put public finances on a sustainable path and make room for the planned further labour income tax cuts. This should be complemented by social security reforms to increase work incentives, especially for older workers and the long-term unemployed...

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      Czech Republic

      Strong consumer spending underpinned a pick-up in growth to about 3 per cent in 2003. Growth is projected to rise progressively further to about 3½ per cent in 2005, due inter alia to strong exports as capacity based on foreign direct investment comes on stream. Layoffs from the still large number of domestic enterprises in need of restructuring will entail continuing net declines in employment this year, though it could stabilise in 2005 as new job creation picks up. The introduction of a legally binding multi-year budgetary framework focusing on output performance rather than financial inputs would help to achieve the intended fiscal consolidation. Monetary policy needs to stay vigilant and make sure that policy-related one-off price changes do not feed into inflationary expectations, by taking early action if necessary...

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      Denmark

      The economy virtually stagnated in 2003, reflecting weakness in both domestic demand and exports. Prospects look brighter for 2004 and 2005, when household spending should accelerate and exports pick up. Labour market pressures eased significantly last year, and collective wage negotiations in spring 2004 have delivered lower compensation increases than the previous rounds. Wage and price inflation should remain contained, as output is projected to stay below potential over the projection period. On top of the tax cuts implemented at the beginning of 2004, the government recently announced further measures to boost activity. Although this extra easing is relatively small, it risks coinciding with new interest rate cuts and already accelerating output. Some of this stimulus will therefore need to be removed as the expansion gathers steam. Further initiatives to raise labour force participation would help to sustain the upturn and bring employment closer to the government’s long term target...

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      Finland

      Growth of about 2 per cent in 2003 was driven by consumption which has been stimulated by a substantial fiscal easing and low interest rates. A pick-up in world trade is likely to boost growth over the coming years, with output rising above potential in 2005 and unemployment edging down. Recent tax cuts will sustain demand, but may ultimately make it more difficult to cope with the future fiscal implications of ageing. The room for further tax cuts is narrow and will require significant spending restraint by central government and municipalities. It is unlikely that cuts in labour taxes will be sufficient to achieve the government’s goal of a substantial increase in employment, unless accompanied by other reforms...

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      Greece

      The economy continued to expand briskly in 2003, with robust domestic demand compensating for weak exports. Nevertheless, the general government deficit rose to 3 per cent of GDP. Activity is set to slow somewhat in the period ahead, as Olympic Games-related investment comes to an end, but growth will continue to outpace the euro area average. Inflation is likely to average around 3¼ per cent over the projection period and the large current account deficit is expected to narrow gradually. Meeting the objectives of further fiscal consolidation and a lower public debt-to-GDP ratio will require much stricter control of public finances, for which the completion of pension and tax reforms and further improvements in administrative efficiency are indispensable first steps. Together with measures to strengthen labour market flexibility, enhanced competitiveness and innovation are also required to ensure non-inflationary growth and the convergence of incomes to European Union levels over the medium term...

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      Hungary

      Growth slowed somewhat in 2003, to just below 3 per cent, but is projected to pick up progressively this year and next on the back of rapid export and investment growth to about 3¾ per cent by 2005. Inflation has picked up since mid-2003 and a further increase is expected up to the middle of this year, largely because of rises in regulated prices and value-added-tax rates. Postponement of entry into the Economic and Monetary Union to 2009 or 2010 is now envisaged, given a disappointing budget deficit outcome for 2003. Improvements to budget processes and a stronger commitment to sustainable spending cuts -- especially as 2006 is an election year - are needed to avoid a repeat of last year’s overshoot and further delay in reaping the gains from euro-area membership...

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      Iceland

      The economy expanded by 5 per cent through the year 2003 and is expected to keep growing at about that pace over the next two years as work on the major aluminium-related investment projects continues. The external account has moved into substantial deficit, but currency appreciation and productivity gains have kept inflation low so far. As increasing capacity pressures are likely to be reflected in higher inflation, official interest rates will need to be raised soon. The appropriate timing and extent of such tightening will depend on how the exchange rate develops and whether the announced fiscal tightening actually materialise . This is uncertain, given the tendency to overspend budgeted amounts...

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      Ireland

      GDP growth plummeted from almost 7 per cent in 2002 to 1½ per cent in 2003, but is set to recover to 3½ per cent in 2004 and 4½ per cent in 2005. With unemployment levelling off at 4¾ per cent and the appreciation of the euro feeding through, inflation is likely to remain subdued. Foreign direct investment is unlikely to be as strong as in the past, which reduces potential growth in the future. Policy should aim to safeguard cost competitiveness. Competition and regulatory policies need to be strengthened in the sheltered sectors to prevent renewed inflationary pressure...

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      Korea

      Buoyant export growth, driven in large part by China, is leading a recovery from the 2003 downturn, despite still-sluggish domestic demand. A rebound in private consumption, which has declined following the end of the household credit boom, is expected to lift economic growth to the 5 to 6 per cent range in 2004 and 2005. The major risk to this export-led expansion would be a weakening in world trade growth before domestic demand revives. The top policy priority is to make further progress in the reform agenda, notably in improving the functioning of the labour market, addressing the problems in the non-bank financial sector and enhancing transparency in the corporate sector. As the recovery accelerates, the extent to which the short-term policy interest rate would need to be raised from its current record-low level will depend on how the exchange rate evolves...

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      Luxembourg

      The economic outlook started to improve in the second half of 2003, and growth should reach 3½ per cent by 2005 as world trade expands and financial markets gradually recover. Private consumption, business confidence and investment are also projected to pick up. However, the economic recovery will not be strong enough to stabilise the unemployment rate. The government should review its spending programmes in line with more moderate medium term growth prospects and use this opportunity to introduce measures to tackle structural unemployment...

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      Mexico

      A recovery has taken root, led by the upturn in the US manufacturing sector. With the external environment expected to remain strong, investor confidence should improve and output growth could accelerate to above 4 per cent in 2005. Employment creation in the formal sector is lagging, but headline inflation has turned up, reflecting mostly erratic factors. Faced with rising inflation expectations in early 2004, the tightening of the monetary policy stance was appropriate. On the fiscal front, the 2003 budget target was easily met, thanks to higher-than-projected oil revenues, and the 2004 budget maintains a firm stance. The public sector borrowing requirement is projected to come down to 2 per cent of GDP by 2005. A strong tax package is required to put public finances on a sounder footing and boost investor confidence...

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      Netherlands

      The economy has finally emerged from recession and GDP growth began to pick up at the end of 2003. It should reach almost 1 per cent in 2004 and about 2 per cent in 2005, reflecting a revival in international trade and the end of a three-year fall in business investment. With much slack in the economy and an agreement to keep wage increases low, inflation should fall to less than 1 per cent in 2005. The government needs to strengthen work incentives by pushing ahead with planned social security reforms and should aim to raise productivity growth by strengthening entrepreneurship and competition, improving human capital and fostering innovation and research...

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      New Zealand

      The pace of activity is cooling as net migration inflows ease, house prices level off and the effects of the exchange rate appreciation spread from the export sector to the economy at large. Together, these factors will reduce pressures on stretched resources and close the output gap, bringing growth onto a more sustainable medium-term path. With the economy likely to head towards a soft landing, the current "wait and see" stance of monetary policy is appropriate, as is the broadly neutral stance of fiscal policy. With potential growth slowing because of weaker population growth, the policy initiatives currently being developed should aim at encouraging greater labour force participation, thus providing a helpful boost to medium-term growth prospects...

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      Norway

      The recovery has gained momentum, fuelled by historically low real interest rates and the acceleration of world demand. Growth for mainland Norway is expected to rebound to around 3¾ per cent during 2004, before falling back toward trend in 2005. Unemployment is likely to decline, albeit slowly, while inflation should eventually rise in response to the weaker exchange rate and the closing of the output gap. Fiscal credibility would be improved via stricter adherence to the fiscal guidelines. The latter would be aided by the planned pension reform and by efforts to control rapidly rising expenditures for sick leave and disability. Along with reforms to strengthen competition in sheltered sectors, such steps would also enhance long-run potential growth...

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      Poland

      GDP increased by 3.7 per cent in 2003, driven by strong export growth following the depreciation of the zloty. A projected rebound in investment activity due to improved profitability and European Union accession should permit growth to reach around 4½ per cent in both 2004 and 2005.Unemployment is expected to begin falling towards the end of 2004 as employment starts to expand, while the still large output gap should keep inflation pressures in check. Following the sharp relaxation of fiscal policy in 2004 and the rapid build up of public debt, the planned public expenditure reform needs to be implemented and even reinforced if medium term fiscal sustainability is to be preserved. Such a tightening of fiscal policy could also serve to reduce inflationary pressures, opening the way for a further reduction in interest rates...

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      Portugal

      After the sharp 2003 recession, a gradual export-led recovery is expected to get under way in 2004. The pace of growth is likely to remain among the weakest in the OECD in 2004, and the negative output gap would remain among the highest in 2005. Against this background and with the unemployment rate still high, the inflation differential vis-à-vis the euro area is expected to remain quite narrow. Despite continuing consolidation efforts, the fiscal deficit is likely to exceed the 2.8 per cent target in 2004, unless additional measures are taken. Structural measures to contain public spending  could have visible effects starting in 2005, but implementation should be stepped up and further action will be needed to contain spending pressure over the medium term...

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      Slovak Republic

      Strong GDP growth is being led by exports, but is now expected to broaden. Headline inflation will remain high during 2004, as a result of a final step of administered price increases towards cost-recovery levels, but should decelerate significantly thereafter. Unemployment, although falling, will remain above 15 per cent. The recent reduction of policy rates by the central bank, in the context of ongoing fiscal consolidation, has helped to balance the policy mix. The ambitious reforms under way with respect to taxes, labour markets, public services, and social assistance have the potential to foster strong medium term growth and employment...

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      • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/spain_eco_outlook-v2004-1-31-en
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      Spain

      Output accelerated during the second half of 2003, driven by buoyant domestic demand.Inflation has drifted down in recent months partly due to the appreciation of the euro, while the inflation differential with the euro area has fallen to ½ percentage point. Activity should continue to firm over the projection period and should grow above potential despite the negative drag of the external sector. With monetary conditions likely to remain relaxed and the output gap closing, the authorities should avoid any fiscal stimulus. This would imply a widening budget surplus over the projection period because of positive cyclical effects. Labour market reforms should aim at increasing wage flexibility, which would also boost productivity performance...

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        http://oecd.metastore.ingenta.com/content/1204751ec032.pdf
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      • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/sweden_eco_outlook-v2004-1-32-en
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      Sweden

      A steady upswing is taking place. Output growth has picked up to its potential rate, driven by household spending and a recovery in exports. External demand is projected to continue to provide stimulus and will be aided by a rebound in business investment. Inflation is below target, although there is a small risk that this year’s wage negotiations may put upward pressure on prices. Fiscal expansion is not warranted; rather, further increases in the structural surplus would be appropriate in order to prepare for looming age-related spending pressures. The Riksbank should also remain cautious, despite the recent surprisingly weak inflation outcomes, maintaining the focus on prospects over a two year horizon and gradually withdrawing monetary stimulus in anticipation of the closing of the output gap in 2005. Reductions in working hours should be avoided...

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      Switzerland

      The recovery, which began in the second half of 2003, seems more robust in Switzerland than in the euro area. With the strengthening of the external environment, the upturn is likely to continue, with output expanding by 1¾ per cent in 2004 and 2¼ per cent in 2005, which is above potential growth. This firming in activity should be accompanied by a gradual decline in unemployment  without generating inflationary pressures. In the absence of price pressures, the authorities should maintain easy monetary conditions for some time until the recovery is firmly established, even if some tightening will eventually be necessary. The fiscal tightening as from 2005 is warranted to consolidate the public finances. In the medium term, the main challenge is to strengthen potential growth and productivity which, first and foremost, requires ambitious reforms in the product markets...

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      Turkey

      Growth was robust in 2003 and should continue above 5 per cent in 2004 and 2005. It is driven by exports and by improved consumer and business confidence, stemming from successful macroeconomic stabilisation which has reduced real interest rates. The government should sustain the recovery by sticking to rigorous fiscal and monetary policies so as to ensure macroeconomic stability. They should also act to develop and fully exploit the potential of the economy by enforcing and strengthening structural reforms in financial, labour and infrastructure markets as well as in the government sector...

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      • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/developments-in-selected-non-member-economies_eco_outlook-v2004-1-35-en
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      Developments in Selected Non-member Economies

      Growth in non-OECD Asian economies picked up at the end of 2003. As a result, the region recorded slightly faster growth last year than in 2002, despite the impact of the Severe Acute Respiratory Syndrome epidemic. Concerns about over-investment have been prominent in China, while elsewhere in the region financial markets have focused on incipient inflationary pressures. The projection period is likely to see slower growth in China, where the authorities appear to be targeting a growth rate of 7 per cent per annum, though this target is likely to be exceeded...

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    • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/housing-markets-wealth-and-the-business-cycle_eco_outlook-v2004-1-36-en
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    Housing Markets, Wealth and the Business Cycle

    Buoyant house prices give a greater boost to consumer spending in countries with more diversified mortgage markets. But distortions to the housing market, such as tax breaks, should be avoided to counter excessive price volatility...

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      http://oecd.metastore.ingenta.com/content/1204751ec037.pdf
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    • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/the-challenges-of-narrowing-the-us-current-account-deficit_eco_outlook-v2004-1-37-en
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    The Challenges of Narrowing the US Current Account Deficit

    Narrowing the large current account deficit would require major changes to exchange rates, to fiscal policy or to the competitiveness of US exports – all of which would impose costs on the US and its on trading partners...

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      http://oecd.metastore.ingenta.com/content/1204751ec038.pdf
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    • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/asset-price-cycles-one-off-factors-and-structural-budget-balances_eco_outlook-v2004-1-38-en
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    Asset Price Cycles, "One-off" Factors and Structural Budget Balances

    A look at how stock market movements have affected government revenues in selected countries...

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      http://oecd.metastore.ingenta.com/content/1204751ec039.pdf
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    • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/enhancing-income-convergence-in-central-europe-after-eu-accession_eco_outlook-v2004-1-39-en
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    Enhancing Income Convergence in Central Europe after EU Accession

    How can the 10 new members catch up with the higher living standards of the existing EU countries?...

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      http://oecd.metastore.ingenta.com/content/1204751ec040.pdf
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    • http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2004-issue-1/statistical-annex_eco_outlook-v2004-1-40-en
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    Statistical Annex
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