Industrial Economies: Growth Expected But Spoilers Remain

It could be a very happy new year for the U.S. and other industrialized nations in both 2006 and 2007.

The latest economic forecast from the Paris-based Organization for Economic Cooperation and Development (OECD) projects inflation-adjusted average growth in 2006 and 2007 of 2.9% among its 30 member nations. That's two-tenths of a percentage point better than the 2.7% with which the countries are expected to close out 2005. Inflation in 2006 and 2007 is expected to be a manageable 1.9%, down from a 2.1% average in 2005. Unemployment among the OECD countries also is expected to be down to an average of 6.3% in 2006 and 6% in 2007 from a 6.5% average in 2005.

Industrialized Nations
	2005	2006	2007
Real GDP	2.7	2.9	2.9
Inflation	2.1	1.9	1.9
Unemployment	6.5	6.3	6.0
Source: OECD. Numbers are percentage change from previous year except for unemployment, which is yearly average.

"World growth has been broadening over the past few months," notes Jean-Philippe Cotis, OECD's chief economist. "Already strong in North America and most of Asia, economic momentum now looks well established in Japan, and continental Europe is progressively recovering from its latest bout of weakness," he says. "One important and reassuring feature of the present situation is that virtually all countries have maintained price stability in the face of the oil price shock, without compromising activity. Higher oil prices have not spilled over into higher wage demands, and long-term inflation expectations seem well anchored."

What could go wrong? Several things, indicates OECD's Cotis. "They include a renewed surge in oil prices, ever-worsening current account balances [the broadest measures of countries' international economic positions] and abrupt exchange rate realignments, as well as long-term interest rate back-ups and asset price reversals." What are the chances of them happening? That's a very difficult question to answer, Cotis says, particularly for energy prices. "On the one hand, oil prices could still be on an upward mid-term path, but on the other hand they may well have overshot in the short-run."