Asset prices may outstrip economic fundamentals, says OECD

Asset prices may increase to levels unjustified by economic fundamentals, the Organisation for Economic Cooperation and Development (OECD) has warned in its latest interim economic assessment.

OECD said financial markets were outpacing real activity which had been held back by business and consumer confidence — and asset prices could increase more than was warranted, it said.

Continuing economic woes in the euro area were delaying a meaningful global economy recovery, it said, although G7 economies would still experience annualised growth of 2.4 per cent in the first quarter of 2013 and 1.8 per cent in the second.

"Bold policy action remains necessary to ensure a more sustainable recovery, particularly in the euro area, where growth is uneven and remains slower than in other regions," OECD chief economist Pier Carlo Padoan said.

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The euro's three largest economies — Germany, France and Italy — were predicted to grow by 0.4 per cent in the first quarter and 1 per cent in the second, with growth in Germany (2.3 per cent in the first quarter and 2.6 per cent in the second) outstripping growth in other euro areas.

OECD said weak growth and low confidence were indicators European unemployment rates may continue to skyrocket.

"The employment situation continues to deteriorate in many countries, making it all the more urgent to implement the labour and product market reforms that can stimulate growth and create jobs," Padoan said.

Growth in the United States was expected to rebound to 3.5 per cent in the first quarter followed by 2 per cent in the second, while Canada was expected to grow at 1.1 per cent and 1.9 per cent respectively.

Japan's growth would accelerate from previous low levels to 3.2 per cent during the first quarter and 2.2 per cent in the second, while the UK would experience 0.5 per cent and 1.4 per cent respectively.

Padoan said differing levels of monetary stimulus were needed for different countries.

"In the United States, the commitment of the Federal Reserve to keep policy rates low until labour market outcomes improve substantially is well judged, but the need for further exceptional monetary measures is waning, while in Japan more aggressive policy action is required to escape deflation and achieve the Bank of Japan's new 2 per cent inflation target," he said.

"In the euro area, there is still some scope to ease monetary policy further, given weak demand and inflation well below the ECB's [European Central Bank's] objective, while further action is needed to repair the transmission mechanism."