Euro zone falls behind North America

OECD advises banks to keep interest rates low, maintain crisis measures

EURO zone nations were falling far behind the US and Canada as a fragile recovery took root in the advanced economies, the Organisation for Economic Co-operation and Development (OECD) said yesterday, advising central banks to keep easy money flowing so that the rebound did not prove short-lived.

The Paris-based OECD forecast that the Group of Seven advanced economies were on course for average annualised growth of 1.9 percent in both the first and second quarters, although rates varied widely.

“There is a recovery which is firming with respect to past numbers. But it is clearly coming at different speeds, with North America and the US growing faster and the euro area still in a weak spot,” OECD chief economist Pier Carlo Padoan told journalists.

An improving US labour market would help its economy grow 2.9 percent in the first quarter on the same basis, and 2.8 percent in the second quarter, the OECD said.

Its latest predictions were contained in a report in which it gives quarterly estimates for a handful of countries ahead of a fuller publication in May.

As unemployment fell in the US, confidence was firming, particularly among households, while easier financial conditions were helping them to rebuild their strained budgets, the OECD said.

“Monetary policy needs to be supportive in the medium term to allow this process to continue,” Padoan said.

With the euro zone creeping out of a sovereign debt crisis, the recovery would be weakest there, with the economies of France and Italy in contraction in the first quarter and Germany eking out growth of only 0.1 percent.

Grappling with weak industrial production and fragile household confidence, Italy would be mired in recession as its economy contracted an annualised 1.6 percent in the first quarter and 0.1 percent in the second quarter, the organisation estimated.

“This is going to be a delicate period over the next quarters,” Padoan said, noting that Italian and Spanish bond yields had begun creeping higher again. “We have to be careful and ready to support the situation.”

OECD secretary-general Angel Gurría called on Tuesday for euro zone nations to ramp up the size of their rescue fund, judging that the debt crisis was not over with banks still weak, debt still rising and fiscal targets far from assured.

Outside the euro zone, Britain’s economy was seen contracting an annualised 0.4 percent in the first quarter before posting growth of 0.5 percent in the following quarter.

In light of the still shaky nature of the recovery, the OECD said that central banks should be prepared to keep interest rates low and maintain other crisis measures “for a considerable time to come”.

“In the euro area one might even argue there is some policy space in the interest rate which could be used given inflation is not a source of concern if activity slows down,” Padoan said.

Among risks to the overall outlook, the OECD estimated that surging oil prices, which have risen 15 percent since the start of the year, would add a quarter of a percentage point to inflation in developed countries and knock 0.1 percent to 0.2 percent off growth on average over the next year. – Reuters