Global economy recovering, but major risks remain, says OECDThursday 24 May 2012
The global economy is gradually gaining momentum, but the recovery is fragile, extremely uneven across different regions and could be derailed by the crisis in the euro area, according to the OECD’s latest Economic Outlook.
"With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence”, OECD Secretary-General Angel Gurría said during the launch of the report in Paris.
GDP growth across the OECD is projected to slow from an annual rate of 1.8% in 2011 to 1.6% in 2012, before recovering to 2.2% in 2013, according to the Outlook.
Private sector demand is expected to push activity up in the United States by 2.4% this year and by a further 2.6% in 2013. In Japan, GDP is expected to expand by 2% in 2012 and 1.5% in 2013. Euro area GDP is forecast to contract by 0.1% this year, before picking up to 0.9% in 2013.
Activity remains strong in most emerging-market economies, but policy challenges vary, with inflation acting as a drag on real incomes in some, while it remains subdued in others. Lower inflation provides policy space in some countries that could be used to sustain activity.
“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said OECD Chief Economist Pier Carlo Padoan.
In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis, the OECD said.
Recovery in the healthier economies, while welcome, is not strong enough to offset flat or negative growth elsewhere in Europe. Weak competitiveness must be addressed in those countries with large external deficits, while structural adjustment and higher wages in surplus countries would contribute to a growth-friendly rebalancing process, the OECD said.
Adjustments in the euro area are now taking place in an environment of slow or negative growth and deleveraging, prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.
On the eve of a European Union summit in Brussels, the OECD suggested Leaders could stimulate growth by:
• comprehensive structural reforms in areas such as education, innovation, competition and green growth.
• further enhancing the firewall to prevent contagion of the euro zone financial crisis;
• boosting the European single market, to support additional economic activity;
• increasing European Investment Bank funding for infrastructure projects;
• making better use of European Central Bank balance sheets.
The OECD warns that failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy. Avoiding such a scenario requires action to be taken both at country and supranational level.
Fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible. Finding a careful balance between spending cuts and revenue increases is critically important. The reform agenda must also be specifically targeted at supporting employment, reducing inequalities and protecting the weakest segments of the population.