Growth in Japan and continental Europe could prove stronger than projected if the interest rate and exchange-rate changes in the past year improve business and consumer sentiment more than expected, stimulating a stronger rebound in domestic demand. However, it is also possible that inflationary pressures in these countries, while not yet evident, are stronger than now thought. There is a downside risk associated with the difficulty facing a number of financial institutions in Japan, France and Italy, although these problems do not so far appear to have constrained overall credit availability. The thrust of macroeconomic policy in each OECD country during the projection period should reflect its current and prospective cyclical position and associated risks and uncertainties. In the United States, the United Kingdom and several other countries with high capacity utilisation, authorities have rightly been concerned about the possibility of overheating, although inflation is currently subdued.
Monetary policy can therefore continue to support the economic recovery until it is more mature.
In continental Europe, there would be room to lower interest rates somewhat further to stimulate activity if necessary, without materially raising the risk of inflation. Improving employment prospects and labour-market participation, and durably reducing chronically high unemployment, remain the most important economic challenges facing many OECD countries, particularly in continental Europe. Although there is a significant component of cyclical unemployment in many countries, which can be expected to decline with economic recovery, the root of the problem is high structural unemployment that has tended to rise over time. In response to these problems, in 1994 the OECD formulated its Jobs Strategy to improve labour market performance and to enhance OECD economies ability to adjust and take advantage of new opportunities, such as those presented by technological change and globalisation. Lessons from Member Countries Experience.