These serious risks have to be overcome in an otherwise hopeful picture of strengthening global recovery and rising trade flows. Unemployment will, however, remain high in major economies, especially Euro area at 10.1 per cent over 2010 and 2011 while in USA it may modestly decline from 9.7 per cent to 8.9 per cent in 2011.

While strong growth in China and other emerging markets including India are helping to pull other countries out of recession, the latest OECD's Economic Outlook cautions the two Asian majors against over-heating and inflation, which would increase risks to global recovery. “A much stronger tightening of monetary policy in some non-OECD countries including China and India, where overheating poses a serious risk, is required to counter inflationary pressures and reduce the risk of asset-price bubbles,” it said.

For India, OECD projects growth at 8.3 per cent this year and 8.5 per cent in 2011 against China's 11.1 and 9.7 per cent respectively. India's non-agricultural sector is growing robustly and an expected rebound in agriculture should raise economic growth and limit further increase in food prices, which have been a major contributor to recent high inflation. However, underlying inflationary pressures are likely to persist given the strong outlook for demand. “Timely policy action to limit the scope for second-round price increases is therefore required. Monetary policy normalisation is also important in light of relatively modest fiscal consolidation“, OECD added.

OECD estimates WPI to rise by 8.1 per cent in 2010 and moderate to 6.3 per cent next year but consumer prices would be in double digit, at 10.2 per cent in 2010 (down from 12.3 per cent in 2009) before slowing down to 6.3 per cent next year. Apparently these estimates are subject to monetary policy tightening steps suggested. Fiscal deficit in 2010 is projected at 10.3 per cent of GDP (down from 11.8 per cent in 2009) and 9.5 per cent in 2011.

For China, growth rates are projected at 11.1 per cent this year and 9.7 per cent in 2011. CPI would be 2.5 per cent in the two years, which is somewhat higher than official target. Overheating has become more of a risk in China where authorities have taken measures to cool property market. It is important, OECD says, to continue to move towards a more neutral monetary policy stance and this would involve some increase in interest rates and greater flexibility in exchange rate regime. In the recent US-China Strategic Dialogue, China took the position that it would decide as and when monetary or exchange rate adjustments would be needed.

On the European debt crisis, the OECD Outlook refers to the 2008 financial crisis leading to “unprecedented and coordinated policy responses that prevented the recession from becoming more severe and long lasting. Recent action taken by euro-area countries, also in coordination with other major economies, is of comparable dimension and momentum“ But, such actions within eighteen months after the first is a reminder that the period of significant financial instability that began in August 2007 is not yet over.

On the basis of its latest GDP estimates for the30-member OECD area, which would grow 2.7 per cent this year, and for leading non-members such as China, OECD projects global economy to expand 4.6% this year and 4.5% in 2011. While the global economy emerged last year from its worst slump in more than half a century, the economies of China and India risk overheating and indebtedness may threaten expansion in the developed world, OECD said. The first substantive risk related to developments in sovereign debt markets, according to OECD chief economist Pier Carlo Padoan.

Instability in sovereign debt markets has highlighted the need for the euro area to strengthen its institutional and operational architecture, he said and called for bolder measures to ensure fiscal discipline. Several countries are already taking early action to enhance the credibility of their fiscal consolidation plans and this is very welcome. With a huge debt burden weighing on many OECD countries and the strengthening recovery, the emergency fiscal measures provided by governments to tackle the crisis must be removed by 2011 at the latest, the Outlook says.

The number of unemployed had risen by 16 million in OECD countries in the past two years and the unemployment rate may now be peaking at an average 8.5% across OECD economies and is likely to fall only slowly in the near term. Governments must make room in their budgets for cost-effective labour market programmes that support workers at greatest risk of becoming long-term unemployed, the Outlook said.

The OECD Report noted the United States appears to be in a stronger position than the euro area, helped by better financial market conditions and “a number of more favorable elements on the fiscal side,” notably the outlook for stronger tax revenues, which means it can delay debt reduction steps until 2015.At the same time, the shift in liquidity from developed markets to such places as China and India, and the weak fiscal position of the euro-area countries present risks, the report said.

On a more positive note for the euro region, OECD says the decline in the euro, which was “a bit overvalued” could help the outlook by lifting the competitiveness of exporters, and also contribute to “rebalance” global economic disequilibrium. If China allows its currency to climb, it would help to offset rising inflation pressure in China and reduce the risk of an economic hard landing, after years of surging growth rates.

The outlook for inflation remains “benign” in the advanced economies due to considerable economic slack but it may become “unanchored” if strong growth in emerging-market economies keeps pushing up energy and commodity prices.

The report forecast real growth in gross domestic product in the United States of 3.2 percent this year and next year. “The Federal Reserve and the administration should gradually with draw policy stimulus as economic growth becomes self-sustaining,” the report said. Growth in the euro-area was estimated at 1.2 percent this year and 1.8 percent next year. For Japan, the economy was forecast to expand 3 percent this year and 2 percent in 2011. The recovery has been driven by exports, despite the significant appreciation of the yen, and fiscal stimulus. (IPA Service)