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Oecd Warns Of European Growth Risk

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"Europe is set to suffer most from the unwinding of global economic imbalances if market turmoil continues, the OECD has warned.

OECD chief economist Jean-Phillippe Cotis said that a decline in the value of the dollar could damage Europe's prospects for recovery.

"A brutal unfolding of such imbalances would hurt the world economy, with perhaps the largest output losses concentrated in the least resilient regions, not least the euro area," he said.

But in his comments to accompany the OECD's semi-annual economic forecast, he added that much of the recent market turmoil could be a useful adjustment to unrealistic expectations about risk.

"If the market prices risk more realistically, this should not be a source of worry," he told reporters in Paris.

The OECD's central predication is that the broad-based recovery in the world economy will continue, with growth slowing slightly in the US and Japan but accelerating in Europe.

If anything, the risks have increased


But Mr Cotis acknowledged that signs of recovery were still fragile in Europe, and urged the European Central Bank to hold off from further rate hikes until the autumn when it would become clear whether economic growth was on track.

However, the ECB has already signalled that it is likely to raise interest rates in June because of inflationary worries.

Mr Cotis said that a rapid depreciation of the dollar could cut into Europe's export-led growth.

The big budget deficits in most EU countries meant it would be difficult to spend more money to stimulate the economy, while interest rates were already at a low level and probably could not drop further.

Buoyant - but vulnerable

Overall, the OECD says that the world economy is still buoyant but "vulnerable" to a number of risks.

And it warns that "if anything, the risks have increased" as regards current account imbalances, long-term interests rates, and houses."

Not exactly new to anyone who has been on this forum for any length of time and previous OECD reports have been quite bearish (particularly the Jan Housing survey accross 17 OECD nations).

More evidence that concern is rife over the potential for the global imbalances to spin out of control - as if it were needed.

Good to see the BBC printing a different side to the story, just a shame they never report on Issues and only news... otherwise people might put 2 and 2 together....

- Pye (property speculation ninja :ph34r: )

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A bit more from the FT on the OECDs report.


House prices pose threat to stability


By Chris Giles and Scheherazade Daneshkhu in London

Published: May 24 2006 03:00 | Last updated: May 24 2006 03:00

Overvalued housing markets and rising long-term interest rates represent one of the greatest combined risks to advanced economies, the Organisation for Economic Co-operation and Development said yesterday.

The housing markets of the US, Spain, France, Ireland and Sweden were most at risk, with a greater than 50 per cent chance of seeing a drop in real prices if prices continued to rise this year and long-term interest rates went up.

"The risks posed by high and in places inflated house prices to financial and economic stability should not be overlooked," Jean-Philippe Cotis, the OECD's chief economist, said in its twice-yearly economic outlook. The report argued that the "extent to which real house prices look to be fairly valued depends critically on longer-term interest rates remaining at or close to their current low levels".

The OECD believes there is a significant risk that bond yields might rise faster than its benign central projection assumes.

Several factors that had contributed to low bond yields were welcome, OECD economists said. These featured lower expectations of inflation among investors and the public in most advanced economies and the failure of inflation to rise significantly even as oil prices had risen in recent years.

Investors had curbed their demand for "term premium", insurance against higher inflation eroding bond values with higher yields for long-dated bonds. This aspect of the reduction in term premium could be regarded as an enduring feature of bond markets, the report noted. But the outlook also cited factors behind low bond yields that were not so welcome and which might not last, implying that buoyant housing markets could be built on sand.

These considerations included an increased desire for saving in Asia and among oil producers since the late 1990s, which has reduced bond yields as money has poured into bonds. Asian central banks have also sought to prevent currency appreciation by accumulating foreign exchange reserves. In turn, this has constituted a leading source of global trade imbalances.

Since such factors were likely to dissipate slowly, the OECD predicted bond yields would rise gradually this year but added that "the risks are skewed to the upside". Rising yields, it said, could spell the end of climbing house prices.

The OECD looked at past peaks in housing markets and searched for a statistical link to interest rates to see whether markets would be vulnerable to a rise in bond yields. It found that if long-term interest rates were to rise by 1-2 percentage points from their current levels, only the markets in Denmark and New Zealand were likely to suffer a reversal.


Edited by HouseDog

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