Euro zone economic growth will slow but stay healthy next year, while easing inflation, tighter credit and a strong euro would make rate rises by the European Central Bank unwarranted, the OECD said this morning.
The Organisation for Economic Co-operation and Development said the 13-nation currency area should emerge relatively unharmed by the current financial turmoil as rising employment and higher wages would eventually fuel domestic consumption.
Euro zone governments should support expansion by cutting budget deficits, strengthening the European Union's internal market and possibly consolidating fragmented financial supervision, it said in a twice-yearly report.
"The outlook remains relatively good, with growth projected to return to its potential rate following some slight near term weakening," it said.
"Rising employment and a moderate upturn in wage growth will underpin household incomes and consumption."
Growth is forecast to slow to 1.9 per cent next year before inching up to 2 per cent in 2009 from 2.6 per cent in 2007 as higher interest rates, a stronger euro and tighter credit conditions are damping activity.
Inflation is expected to hold at 2.2 per cent in 2008, unchanged from this year and not much above the European Central Bank's target of just below 2 per cent, falling from November's six-and-a-half-year high of 3 per cent.
The ECB meets to review interest rates today amid expectations it will keep the current 4 per cent reference rate unchanged because of the prospects of an economic slowdown.