OECD reports global rebalancing -- Do the same

March 24, 2007

The OECD Economic Outlook reports that the global economy is rebalancing, with the U.S. slowing, Europe becoming stronger, and Asia’s recent stock market volatility a sign that it is backing off of an overheated situation. In particular,

• The decline in the U.S. housing market has reduced GDP growth from 4% to 3%. The economy is being supported by higher exports, brought about by a declining dollar, and decline in oil prices over the winter. Growth is expected to remain sub-par throughout 2007.
• The outlook for Europe's economy is above expectations, thanks to strong domestic demand and good economic management in Germany. (Thanks to Angela Merkel's leadership!) Growth will decline a bit in the first half of 2007 as Germany’s Value Added Tax makes import prices higher.
• Japan’s economic recovery is on track, due to strong exports (a result of the artificially low yen value). However, domestic consumption is low since wages are below par. As the Bank of Japan slowly increases its central interest rate, the yen should strengthen which could decrease exports.

What the OECD Economic Outlook means:
The OECD reports on the economic health of the developed countries twice per year. So far, its forecast has been on track - that global economic growth is shifting from the U.S. and emerging markets to Europe and Japan. However, although these economies are growing, they will not grow as fast as the emerging markets, nor be as powerful as the U.S. economy.

Therefore, while it is good to know where the growth areas are, the overall global growth is starting to cool off. Although this is a good thing, it also means slower results for your personal finances.

Action steps:
If you haven’t done so already, talk to your financial advisor about rebalancing your asset allocation. Depending on your personal situation, a shift from the U.S. and emerging markets towards Europe and Japan funds might reduce some risk, while keeping some growth in your portfolio.

Source: OECD web site, OECD Economic Outlook

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