G7 Growth Puts Eurozone, U.S. On Rate Alert Says OECD

Industrialized economies are heading for growth of 3% this year, the Organization for Economic Cooperation and Development (OECD) said on Sept. 5 suggesting that interest rates in the eurozone and U.S. could rise further but that the Bank of Japan should be cautious.

"Growth is likely to slow somewhat in Europe while the U.S. and Japanese expansions regain some momentum," OECD chief economist Jean-Philippe Cotis said.

The OECD predicted that the U.S. economy would grow by 3.6% this year, unchanged from the previous forecast. Growth in Japan was revised down to 2.5% from 2.8%, while estimates for growth in the eurozone were upgraded sharply to 2.7% from 2.2%.

In the U.S rising consumer spending and strong exports pointed to "robust GDP growth in the third quarter." Japanese growth owed to investment by companies and consumer spending, the result of positive business sentiment and an improving jobs market.

In the U.S., further increases in the cost of borrowing "may turn out to be warranted if activity and prices do not slow down over the next few months as past interest rate hikes and housing market softening work their way through."

"Another prominent set of risks relates to long-term interest rates and real estate against the backdrop of cooling housing markets in North America," Cotis said.

He also urged governments not to repeat errors made at the end of 1990s when high tax revenues from strong economic growth were used to increase public spending. "We wasted all our ammunition at a bad moment, at a moment when the economy did not need higher spending, and afterwards this ammunition was lacking to sustain growth during a low point (in the economic cycle)," he said.

Copyright Agence France-Presse, 2006

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