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Since we published our last Outlook, the world economy has once more confirmed its ability to withstand shocks and maintain momentum. Asia has forged ahead, with China enjoying double-digit expansion and India growing very rapidly as well. After years of deflationary weakness, Japan has embarked on a new path, with personal consumption and labour income joining exports and business investment as the main drivers of growth. In the United States, hurricanes had a damaging but only transient impact on activity, which was already bouncing back early in 2006. In Continental Europe, activity weakened again late last year, partly reacting to rising oil prices, but accelerated in early 2006.
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Against a backdrop of continued global buoyancy, the ongoing expansion of the OECD economy is entering its fifth year. Notwithstanding headwinds from high and volatile energy prices, it is projected to continue and even broaden this year and next, helped by supportive financial market conditions in a context of contained inflation. The US economy should decelerate marginally, with growth settling around its potential rate. In Europe, where the cycle has been lagging, the pace of activity is expected to gradually pick up. China is expanding rapidly and Japan’s economy, which has now fully recovered, remains vigorous.
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Public spending on health and long-term care is likely to put considerable pressure on government budgets in the future. Such spending has already risen over the past three decades, accelerating since the turn of the century to reach almost 7% of GDP for OECD countries on average in 2005. OECD projections suggest that in the absence of policy action, the average spending share could almost double by 2050, albeit with considerable variation across individual countries. This chapter presents the projections, highlighting the many uncertainties -- related both to policy and to the underlying drivers of spending -- but also what seems like more robust conclusions.
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Some gradual rebalancing of economic growth is expected between the US and Europe in the second half of 2006, according to the OECD’s interim assessment. Chief Economist Jean-Philippe Cotis said that after the catch-up in activity earlier in the year growth is likely to slow in Europe while expansion in Japan and the US regains momentum.