OECD warns on growth

The outlook for the world economy is undimmed by the recent turmoil in equity markets, the Organisation for Economic Co-Operation and Development (OECD) said yesterday.

However, the OECD, which comprises some of the world's 30 richest nations, also warned that risks to growth, far from evaporating, had increased.

Jean-Philippe Cotis, chief economist of the Paris-based organisation, said the disruption in the markets indicated a correction in the pricing of risk more than the early stages of a disorderly unwinding of global trade imbalances.

European shares rebounded strongly from recent woes yesterday, posting their biggest one-day points rise since March 2003. In Dublin, the Iseq index rose 2 per cent on the day. Indices had lost all of their gains for the year in the past two weeks on fears of rising interest rates.

In its latest economic review and outlook, the OECD predicted growth in the euro zone would accelerate markedly, hitting 2.2 per cent this year from 1.4 per cent last year and slightly ahead of the 2.1 per cent projected in its last outlook in November.

More broadly, it raised its global growth forecast to 3.1 per cent in 2006 from its 2.9 per cent projection of November.

Mr Cotis reiterated his view that interest rates should not rise too quickly in the euro area, suggesting that the European Central Bank (ECB) hold off further rises until October when more hard data evidence would be available. He also said the risk of a downturn in property markets was increasing.

"The need for monetary tightening should become clearer. Its actual pace, however, should be conditional on unambiguous signs that economic slack is shrinking, which hard data is not as yet confirming," Mr Cotis said.

The comment echoed earlier remarks by International Monetary Fund chief Rodrigo Rato, who on Monday urged the ECB to be cautious during the early phase of Europe's recovery.

But ECB governing council member Klaus Liebscher, who is also governor of the Austrian central bank, accused the OECD of interfering with the ECB's mandate. "I think every institution should care about its own duties. Interest rate policy is done by the ECB and we have to make our decisions based on our own findings," Mr Liebscher said.

Higher growth expectations have prompted fears that the ECB will raise interest rates by a half of one per cent when its governing council meets next week. - (Additional reporting: Financial Times service/Reuters)