Industrialised economies are heading for growth of 3% this year, the OECD said today suggesting that interest rates in the euro zone and US could rise further but that the Bank of Japan should be cautious.
Upgrading its forecast for the G7 countries from 2.9%, the OECD said that the world economy was on an upwards path with vigorous growth in the euro zone set to be mirrored in the US and Japan in the rest of this year.
'Growth is likely to slow somewhat in Europe whilst the US and Japanese expansions regain some momentum,' OECD chief economist Jean-Philippe Cotis said.
The Organisation for Economic Cooperation and Development predicted that the US economy would grow by 3.6% this year, unchanged from a previous forecast made in May.
Growth in Japan was revised down to 2.5% from 2.8%, while estimates for growth in the euro zone were upgraded sharply to 2.7%from 2.2%.
The outlook for interest rates was mixed, the OECD said, recommending higher rates in the euro zone and a wait-and-see approach in Japan. In the US, it said that further interest rate increases by the Federal Reserve might be warranted this year.
The OECD predicted that the trend in the second half of the year would be the reverse of that seen in the first half, when the strength of the euro zone surprised economists and the US and Japan were 'significantly weaker' than expectations.
The report by the OECD was an update to its last world economic study published in May, but was limited in scope to the euro zone and the G7 countries of the US, Japan, Germany, France, Britain, Italy and Canada.
Advice to the European Central Bank that it should continue raising rates represented a key change from the report in May when the OECD, an influential international economics body, had warned about the effect of higher rates on a fragile recovery in Europe.
The OECD acknowledged that the euro zone had expanded quickly in the second quarter owing to a one-off effect from the soccer World Cup, spending in the German construction sector and falling unemployment across the 12-country area.
'Given the stronger-than-expected momentum in the first half year-average GDP growth is now slated to reach 2.7%,' Cotis said.
Arguing the case for higher interest rates, he continued: 'In the euro area, the recovery now seems sufficiently robust for a return towards a neutral monetary stance, but gradually so, since unit labour costs remain well in check.'
In the US, where growth of gross domestic product measured 2.9% in the second quarter, rising consumer spending and strong exports pointed to 'robust GDP growth in the third quarter' for the world's biggest economy.
Japanese growth owed to investment by companies and consumer spending, the result of positive business sentiment and an improving jobs market. 'As a result, the expansion (in Japan) is on course to become the longest in half a century,' the OECD said. The Bank of Japan should wait to see that a 'new series of core inflation (excluding energy and food) is firmly in positive territory' before raising rates.
In the US, 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'.
Cotis reiterated lurking dangers for the world economy however, including inflation in the US, deflation in Japan and high oil prices of between $70-80 a barrel. 'Another prominent set of risks relates to long-term interest rates and real estate against the backdrop of cooling housing markets in North America,' he 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.
