OECD predicts more euro area growth

An overdue economic recovery has finally taken hold in the euro area but structural reforms are needed to ensure long-term growth, the OECD has said.

The Paris-based think tank's latest report shows that the euro area's GDP grew by roughly 3.5 per cent in the first half of 2006.

This represents a significant improvement on the 1.5 per cent growth rate recorded in 2005.

While export activity has been increasing since 2003, the recovery has now broadened to business investment. This sector experienced a sharp pick-up last year as pent-up investment demand, which had been put on hold during 2005, started to filter through.

According to the report, the bounce back has been widespread, with almost all member states experiencing healthy growth.

GDP growth of 2.25 per cent is predicted for 2007 and 2008. However, the report warns that this level of growth is still modest by OECD standards.

The unemployment rate in the euro area has dropped below 8 per cent for the first time since 2001 as the job-creation rate steadily creeps upwards.

Despite these positive economic indicators, the recovery remains fragile. The OECD warned that structural reforms must be put in place to increase the resilience of the economy and improve its ability to absorb shocks.

And while the introduction of the single currency has brought significant benefits to member states, the extent of these benefits has been hampered by existing structural rigidities.

Structural reforms should focus on boosting labour market flexibility, increasing competition and integrating financial markets. "These reforms will not only promote faster adjustment to shocks, they will help overcome the main problem that many euro area countries face: slow potential growth," the report said.

A number of threats to a sustained economic recovery persist. Key risks include a greater-than-expected slowdown in the US economy and an increase in oil prices.

Meanwhile, a deterioration of housing markets could damage the construction sector, while a sharp appreciation of the euro would put pressure on exporters. The ageing population of the euro area could magnify problems.

Despite the potential threats to the economy, continued growth is considered by the OECD to be the most likely outlook at the moment.

The report also emphasised that the economic recovery presented a "golden opportunity" to get fiscal policy back on track.