OECD Economic Outlook

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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, government spending, 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 general debt.
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OECD Economic Outlook, Volume 2007 Issue 2

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06 Dec 2007
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Twice a year, the OECD Economic Outlook analyses the major trends and examines the economic policies required to foster high and sustainable growth in member countries. Developments in major non-OECD economies are also evaluated. This issue covers the outlook to end-2009. Together with a wide range of cross-country statistics, the Outlook provides a unique tool to keep abreast of world economic developments. In addition to the themes featured regularly, this issue contains a special chapter entitled Corporate saving and investment: Recent trends and prospects.
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  • Dealing with risks
    Several shocks have hit OECD economies recently: financial turmoil, cooling housing markets, and higher prices of energy and other commodities. Fortunately, they have occurred at a time when growth was being supported by high employment that boosts income and consumption; by high profits and strong balance sheets that underpin investment and resilience in the face of financial losses and tighter credit; and by still buoyant world trade driven by robust growth in emerging economies. Hence, although near-term growth has been revised down virtually everywhere in the OECD area, the baseline scenario depicted in this Economic Outlook is actually not that bad in view of the recent shocks. It represents the outcome that carries the highest probability in the current more uncertain situation and involves:
  • General Assessment of the Macroeconomic Situation
    2007 is set to become the fourth year of above-trend growth in the OECD area (Table 1.1), but activity is now moderating. One cause of this moderation is the cooling of housing markets, which will act to slow down growth going forward and involves some downside risk. Adding to downside risk, the financial turmoil that began over the summer has not yet played itself out, with the eventual fallout on the real economy still hard to gauge. At the same time increases in the prices of oil, food and other commodities have led to a pick-up in headline inflation rates in many countries.
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  • Expand / Collapse Hide / Show all Abstracts Developments in individual OECD countries

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    • United States
      Healthy gains in private consumption have helped to keep GDP growth above trend thus far this year. However, the correction in residential construction is likely to accelerate over the near term, and housing wealth could decline which, together with weaker labour market conditions, could lead to lower consumption growth over time. GDP should therefore slow to a pace below potential in 2008 and then recover in 2009, although there are considerable downside risks. Headline inflation has recently moved up, but core inflation seems to have stabilized near 2% and, assuming that energy prices level out, inflationary pressures should remain fairly moderate over the projection period.
    • Japan
      The economic expansion -- the longest in Japan’s post-war history -- continues despite some deceleration in the pace of growth since early 2007. A further tightening of the labour market is projected to reverse the decline in wages, helping to sustain output growth of some 1½-2% in 2008-09 and pushing inflation into positive territory.
    • Euro area
      The expansion has continued but at a slower pace than in 2006. Higher interest rates, a stronger euro and tighter credit conditions are all damping activity. But the outlook remains relatively good, with growth projected to return to its potential rate following some slight near-term weakening. Rising employment and a moderate upturn in wage growth will underpin household incomes and consumption. Inflation has veered up due to a sharp rise in energy and food prices but is expected to decelerate to below 2%.
    • Germany
      After slowing in the second quarter, growth has picked up in the third quarter on the back of strong domestic demand. The output gap is likely to be almost closed. Going forward, growth is projected to advance at near trend rates during 2008 and 2009. Following some near-term headwinds, unemployment may continue to edge down but at a much slower pace than in the recent past. The slower projected expansion largely reflects a diminishing contribution from net exports that is not fully compensated by stronger private consumption.
    • France
      After slowing in 2007, growth is projected to average below 2% in 2008, with a weak first half but some rebound thereafter, and continuing at near potential rates in 2009. Job creation will continue, albeit at a slower pace, allowing for further slight declines in the unemployment rate. Following several years of budgetary consolidation, no further improvement in the budget deficit is expected, with a reduction in both revenues and spending in relation to GDP.
    • Italy
      GDP slowed in the first half of 2007, as export growth weakened, rebounded in the third quarter but may weaken again in the fourth. Growth over the course of 2008-09 is projected at near its potential rate of just under 1½ per cent. Unemployment, which continued to fall through the first half of 2007, should decline further but at a slower rate. The recent pick-up in price inflation may persist into 2008 and 2009.
    • United Kingdom
      GDP grew at an above-trend pace of close to 3% through the first three quarters of 2007. However, growth is expected to be weaker in coming quarters, as both investment and consumer demand are likely to be damped by much weaker activity in the housing market, together with tighter credit conditions. Consumer price inflation has dropped sharply and is expected to remain close to the 2% target over the next two years.
    • Canada
      The economy has been operating above its estimated production potential, but it is expected to decelerate noticeably in the short term as lower external demand and the marked currency appreciation damp activity. Yet growth is likely to rebound quite rapidly once the effects of these international factors disappear. A slowing in commodity-price increases, the federal Goods and Services tax cut and the stronger Canadian dollar should contribute to a temporary decline in inflation.
    • Australia
      Output growth, which could reach 4¼ per cent in 2007, is expected to slow gradually to 3½ per cent in 2008 and 3% in 2009, a pace close to the potential growth rate. This slowdown, which will be accompanied by a further tightening of monetary policy to keep inflation in line with the Reserve Bank’s inflation target, should ease strains in the labour market.
    • Austria
      A slowdown in net exports and investment is expected to result in GDP growth decelerating from almost 3½ per cent in 2007 to about 2½ per cent in 2008 and 2009. Headline inflation is projected to temporarily move above 2% in the short-term on account of rising oil and food prices.
    • Belgium
      Real GDP growth has moderated from its recent robust pace and is likely to slow further toward the potential rate in the short term, though leaving the output gap at a positive level. Domestic demand continues to underpin the expansion, boosted by higher employment and real incomes. Inflation is projected to increase somewhat in response to rising cost pressures.
    • Czech Republic
      A policy-driven spike in inflation in the first half of 2008 is going to temporarily dent otherwise healthy economic conditions, and real GDP growth will dip below potential as the increases in indirect taxation and administered prices squeeze consumption. Underlying inflation is low, but is creeping up and further tightening of monetary conditions is expected.
    • Denmark
      GDP growth has slowed, but the positive output gap remains large with labour and capacity shortages evident. The inflow of workers from abroad has allowed employment to rise strongly. Nevertheless, wage growth is now gaining momentum, and loss of competitiveness is expected to weigh down on growth in the coming years.
    • Finland
      Output grew by 5% in 2006, and strong growth has continued into 2007, underpinned by a robust export performance and sustained strength in consumption. While healthy employment growth is projected to continue, leading to a further decline in unemployment, output growth is expected to moderate.
    • Greece
      Activity has been strong so far in 2007, despite the impact of forest fires and a slowing of housing investment towards a more sustainable level. Growth is set to weaken in 2008, before edging up to around 4% in 2009. Inflation is likely to rise in the light of demand pressures and the current account deficit is expected to remain large.
    • Hungary
      Growth decelerated markedly during 2007, reflecting fiscal consolidation. It is likely to recover over the projection period, supported by buoyant exports and gradually reaccelerating investment and consumption. Inflation is projected to decelerate towards the 3% target, as wage growth remains moderate. The external deficit should continue to improve.
    • Iceland
      Expansionary government measures have rekindled demand and inflation pressures at a time when imbalances in the economy remain substantial. Still, tight monetary policy is expected to eventually succeed in slowing the economy, taming inflation and reducing imbalances. However, the slow and uneven adjustment process leaves the economy vulnerable to changes in foreign-investor sentiment, especially in a context of fragile global financial-market conditions, and has increased the risk of a harder landing of the economy.
    • Ireland
      Activity was strong in the first half of 2007, but the slump in house-building will slow growth substantially. GNP is expected to increase by 3% in 2008, which is considerably below the growth rate of potential output, but to recover to grow at 4½ per cent in 2009 as housing construction levels out at a sustainable level. Inflationary pressures will ease and unemployment is likely to increase.
    • Korea
      An acceleration of domestic demand, combined with continued buoyant exports, is projected to keep economic growth at around 5% in 2008-09. Strong demand from other Asian countries is sustaining export growth at double-digit rates, despite the appreciation of the won, which has helped to keep inflation below the Bank of Korea’s target zone
    • Luxembourg
      Growth was well above that in other European economies in 2007. Largely unaffected by the turmoil on international markets due to its strong position in the mutual funds sector, financial services continued to be the main driver of economic growth. Strong private investment and manufacturing exports also contributed to the expansion. The improved employment prospects spread from crossborder workers to residents, enabling a gradual reduction in the unemployment rate. Despite a loss in price competitiveness, the recovery is set to weaken only moderately and growth is likely to remain above potential growth through to 2009.
    • Mexico
      After a moderate slowdown in 2007, reflecting a weakening of external demand, GDP growth is expected to accelerate in the course of 2008 and reach 4¼ per cent in 2009. The approval of the fiscal reform should boost business confidence, underpinning stronger (domestic and foreign) investment. Inflation, affected by the increases in international oil and food prices, may rise to above 4% during 2008, easing down thereafter, and approaching the inflation target by the end of 2009. The current account deficit is expected to widen gradually.
    • Netherlands
      The economic expansion remained strong in 2007 and is expected to reach 3% for the second year in a row. Over the projection period above-potential growth is projected to continue, reflecting both robust domestic demand and dynamic export markets. However, labour shortages are likely to persist, partly reflecting population ageing, which will increasingly hamper the expansion of the economy. Indeed, inflation pressures are expected to increase gradually.
    • New Zealand
      Activity thus far in 2007 has picked up markedly in a context of unprecedented high prices for New Zealand’s major commodity exports, maintaining pressure on resources and inflation. Monetary conditions have been tightened, while domestic risk spreads have widened in conjunction with the international financial-market turbulence. These factors should cause growth to slow over the near term, allowing a moderation of inflation and eventual monetary easing.
    • Norway
      After a long period of robust growth, which continued unabated in the first half of 2007, there are signs that mainland Norway is reaching the peak of the cycle with a large positive output gap. Tightening monetary conditions are beginning to exert a cooling effect and further expansion is made difficult by very high capacity utilisation. Some of the forces that kept price increases down are diminishing and inflation is now picking up slightly.
    • Poland
      The first half of 2007 saw an acceleration of economic activity, driven by booming domestic demand. Growing labour shortages have fuelled strong wage increases. The pick-up in unit labour costs and record-high capacity utilisation rates have darkened the inflation outlook. Persistent strength in domestic demand should support growth, but the current account deterioration is projected to continue.
    • Portugal
      The expansion has become more broadly based in 2007. Following a period of buoyant export growth, investment is picking up. Growth is expected to strengthen further in 2008 and 2009, largely driven by domestic demand. The still large negative output gap should drive inflation down in 2009. Though gradually declining, unemployment remains high and, as a result, wage increases are set to be moderate.
    • Slovak Republic
      Economic growth is projected to ease to 7% by 2009 as the rate at which new export-oriented manufacturing capacity comes on stream declines. Unemployment is projected to fall to 9½ per cent in 2009. Further disinflation will be slowed by higher food prices, increases in indirect taxes and the assumed euro changeover in 2009.
    • Spain
      Economic growth is likely to slow in 2008 and 2009, as residential construction falls. Private consumption may decelerate, reflecting lower employment gains and tighter credit conditions. From a peak in late 2007, inflation should decline as demand pressures moderate.
    • Sweden
      After posting very strong growth in 2006, the Swedish economy cooled during 2007, due mainly to weaker export growth. Domestic demand is expected to continue to grow markedly in the near term as strong employment growth and income gains should boost private consumption.
    • Switzerland
      Economic growth is expected to slow to about 2% in 2008 and 2009, close to the potential rate, with a diminished contribution from net exports. Employment should continue rising, although unemployment may not fall much further. Inflation is projected to rise modestly, reflecting past oil-price rises and a high level of capacity utilisation. The government budget surplus will decline.
    • Turkey
      The economy, which had slowed down earlier in the year as a result of monetary tightening in 2006 and political uncertainties in the spring, gained momentum after the summer elections. In the absence of shocks, growth should settle at around 6% in 2008 and 2009.
    • Brazil
      GDP growth picked up in the first half of 2007. Private consumption continues to support activity on the heels of strong credit increases and rising incomes. The expansion of investment has been particularly sharp. Export performance remains robust. But a vigorous pick-up in imports, especially of capital goods and intermediate inputs, is beginning to weigh on the trade surplus. Inflation remains well below the central target, despite an uptick in mid-year on the back of food price hikes.
    • China
      After moderating in the second half of 2006, economic growth has accelerated again and is expected to reach almost 11½ per cent in 2007, leading to a widening of the output gap. The inflation rate is projected to increase to around 4½ per cent in 2007 and stabilise thereafter as weaker food prices are estimated to offset accelerating non-agricultural prices. Despite continued strong export growth, output is likely to slow in 2008 and 2009 as imports accelerate. Nonetheless, the current account surplus is projected to rise from around $350 billion in 2007 to over $500 billion in 2009, passing from 11¼ to 11¾ per cent of GDP
    • India
      The economy grew rapidly in the fiscal year (FY) 2006, expanding by 9.4%. Strong growth was fuelled by a good performance of the agricultural sector and continued strength of industrial output. In the first half of FY 2007, investment remained buoyant, leading to improvements in the supply potential of the economy. With higher interest and exchange rates, output growth is projected to gradually slow to 8.4% by 2009. The current account deficit is likely to widen from 1.1% of GDP in FY 2006 to 2.0% by 2009. Inflation, as measured by the GDP deflator, is expected to ease back somewhat over the projection horizon as increases in food prices moderate.
    • Russian Federation
      Real GDP growth is set to accelerate in 2007, before moderating over the projection period as oil and metal prices stabilise at their current high levels. Domestic demand will remain strong, but the exceptional rates of investment growth observed in the first half will not be sustained. Fuelled by relaxed monetary conditions and the tightening of the labour market, inflation is set to hit double digits at the end of the year and will, in any case, exceed the central bank target of 8% by a wide margin.
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  • Corporate Saving and Investment
    For the aggregate OECD corporate sector, the excess of gross saving over fixed investment (i.e. net lending) has been unusually large since 2002, even allowing for the recent fall (Figure 3.1). Indeed, while attention has increasingly focussed on the emergence of global financial imbalances and a possible global "saving glut",1 aggregate OECD corporate net lending rose slightly more over 2001-05 than the aggregate external surplus of the...
  • Statistical Annex
    This annex contains data on some main economic series which are intended to provide a background to the recent economic developments in the OECD area described in the main body of this report. Data for 2007 to 2009 are OECD estimates and projections. The data on some of the tables have been adjusted to internationally agreed concepts and definitions in order to make them more comparable as between countries, as well as consistent with historical data shown in other OECD publications. Regional totals and sub-totals are based on those countries in the table for which data are shown. Aggregate measures contained in the Annex, except the series for the euro area (see below), are computed on the basis of 2000 GDP weights expressed in 2000 purchasing power parities (see following page for weights). Aggregate measures for external trade and payments statistics, on the other hand, are based on current year exchange rates for values and base-year exchange rates for volumes.
  • What is the economic outlook for OECD countries?

    Inflation in US and Europe is at uncomfortable levels as economies slow, the OECD says in its latest interim assessment. But in contrast to the US, the near-term outlook for the euro area does not point to the need for policy stimulus.

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