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2005 OECD Economic Outlook, Volume 2005 Issue 1

image of OECD Economic Outlook, Volume 2005 Issue 1

Presents OECD's assessment of the economic outlook to the end of 2006 for the OECD area and China, Brazil, and the Russian Federation.  It finds that Japan and the US have rebounded but that Europe is lacking in sustained momentum, and it carefully examines why. This issue of the OECD Economic Outlook also includes several medium-term scenarios projecting to 2010. The special chapter covers measuring and assessing underlying inflation.

English German, French

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Euro Area

The recovery has lost momentum since mid-2004, but it should resume in 2006. Growth is projected to drop from just below 2% in 2004 to 1¼ per cent in 2005 before recovering to around 2% in 2006, with final domestic demand firming. The output gap will remain negative and the unemployment rate high at over 8½ per cent. Once the impact of the oil price hike peters out, headline inflation should fall to 1¼ per cent. Another hike in oil prices or a further appreciation of the euro could sap the recovery further.

With inflation declining and a large output gap prevailing in 2006, there is room to ease monetary policy, even though liquidity will have to be withdrawn again once the recovery is firming towards the end of the projection period. The euro area lacks resilience against adverse shocks amid slow trend growth -- less than 2%per annum. Both are shaped by structural factors. Structural policies should aim at completing the European internal market, boosting labour market performance and encouraging innovation. Fiscal policy should be rooted in long-term sustainability goals.

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