May 25, 2007 | posted by Michael Baxter in IABN |

This is the prognosis. A soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China. It’s all rather benign, says the OECD in its latest report.

The OECD said “Recent ‘hard data,’ as well as consumer and business confidence, suggest that in the euro area a vibrant German-led recovery has remained on track, despite a large VAT hike at the start of this year. Interestingly, the so-far lagging Italian economy has been sharing in the upswing, notwithstanding the volatility of the quarterly accounts. All told, the recovery in Germany and Italy in 2006-07 is set to be much stronger than initially expected.”
“In China,” said the OECD, “the authorities are struggling to contain business investment with a view to reining in the pace of the economic expansion, which at over 11 per cent most recently may have exceeded the speed limit. Such buoyancy should provide solid support both for the ongoing Japanese export-led expansion and other trading partners.”
But that bogey man inflation still threatens to scupper it all. The OECD said: “The rebalancing is not without risks. On the monetary front, there is a risk that, in many places, the balance between aggregate demand and supply has already started shifting towards overheating, at a time when the appetite for fiscal tightening may be waning.”
The OECD then went on to warn about the recent fears of bubbles building in stock and housing markets. It said: “As a general rule, spreads on risky bonds are close to historical lows and for a range of financial assets OECD analysis suggests that risk may be under-priced. Equity prices may be somewhat on the high side, for example, although current potential overvaluation in stock markets pales in comparison with the excesses that prevailed in the late 1990s.”
But what about Blighty? The OECD said “The amount of residual economic slack is also uncertain in some of the other main OECD regions, notably in continental Europe and the United Kingdom. This constitutes a challenge for central banks, which, on both sides of the Atlantic, should probably err on the side of tightness.”
Urrrrr, so what does that mean then? It means that the OECD reckons the Bank of England should continue with its tough(ish) stance on the rate of interest. In other words, the OECD thinks interest rates will stay at their current level for quite a while yet.