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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.

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Iceland

The economy is overheating, prompting aggressive monetary tightening to steer inflation back to the official target. With huge external deficits and debt levels, waning capital inflows as the large-scale investment projects gear down could lead to a reversal of the substantial currency appreciation in recent years, the first signs of which may already be seen. This could entail a protracted period of high interest rates and possibly a full-blown recession, as happened following the previous overheating period in 2002.

Further interest-rate increases will probably be needed to forestall a wage/price spiral. Now that tax cuts have been passed, the government should aim at budget surpluses higher than those currently planned to ensure a better policy mix. This should involve additional spending restraint and reductions in tax expenditures favouring the booming housing sector.

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