Outlook Overview: OECD Countries UN LINK Conference, Bangkok 26 28 October, 2009 Dave Turner OECD, Economics Department
OECD Outlook: Outline 1. Recovery underway but will probably be slow 2. Risks and uncertainties on both sides, more worries on downside 3. Exit strategies very difficult, scope for policy errors
Corporate bond spreads have come down Note: Spreads between corporate bond and government bond yields. High-yield bonds are Merrill Lynch indices; corporate BBB rated bonds (Merrill Lynch) based on average yields for 5-7 years and for 7-10 years; corporate AAA rated bonds are Merrill Lynch for USA, IBOXX for euro area. Source: Datastream.
6 4 Financial conditions indices have recovered United States Euro area Japan United Kingdom 6 4 2 2 0 0-2 -2-4 -4-6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-6 A unit decline in the index implies a tightening sufficient to produce a reduction in the level of GDP by 1% after 4-6 quarters.
World trade volume has stabilised (Index, 2000 = 100) Source: OECD Secretariat.
The recovery is underway in most BRIC countries (Industrial production, Index, 2007 = 100, three month averages) Source: Datastream. OECD, Main Economic Indicator database.
The inventory cycle is turning
A slow recovery is foreseen Growth is likely to strengthen only very gradually, output gap largest this year, closing only slowly due to: headwinds from balance sheet adjustment fading effects from inventories and fiscal stimulus (which will turn to consolidation) gradual normalisation of financial conditions Unemployment is likely to continue rising: for a little while in the US where labour shedding has been rapid for much longer (possibly to end 2010/early 2011) in the euro area where working time has so far cushioned employment Inflation is set to be low: underlying inflation could fall further only a few countries would see negative inflation
Repairs to household balance sheets and high unemployment suggest saving may remain high (Percent of disposable income) Source: OECD Secretariat.
Business investment as has fallen sharply (% GDP) % 30 25 Average trough since 1980 2009q2 Most recent peak Average 1980-2003 30 25 % 20 20 15 15 10 10 5 AUS NOR ESP SWE KOR FIN NZL NLD USA DEU ITA GRC BEL FRA CAN AUT DNK OECD JPN ISL GBR IRL 5 Countries ranked according to difference between position in 2009Q2 and the average of previous troughs. 10
Oil prices have rebounded Source: Datastream. OECD, Main Economic Indicator database.
Source: OECD Secretariat. Headline fiscal deficits have surged
Sovereign bond spreads in the euro area still high relative to pre crisis level Spread with German yield 3.0 July 07 March 09 May 09 September 09 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 GRC IRL PRT ITA AUT BEL ESP FIN DNK NLD FRA 0.0
Exit strategies are difficult Fiscal: When to withdraw stimulus and when to start consolidation? Need for credible medium term consolidation plans. Monetary: given low inflation most OECD countries wait before normalising policy rates. Financial: Maintain pressure on banks to write down problem assets. Credit easing measures tapered off with clear road map... Structural policy: Crisis measures (car industry, short time working schemes) need to be scaled back as recovery progresses. Measures to support job search to avoid hysteresis. Renewed drive to implement structural reforms could help fiscal consolidation.
Outlook Overview: OECD Countries UN LINK Conference, Bangkok 26 28 October, 2009 Dave Turner OECD, Economics Department
Policy rates have remained at low levels (Percent) Source: US Federal Reserve, Bank of Japan, European Central Bank.
Central bank balance sheets have expanded strongly in the United States and the euro area Source: US Federal Reserve, Bank of Japan, European Central Bank.
Governments have introduced a wide range of measures Increase deposit insurance Bank liabilities Guarantee or buy bank debt Inject Nationalise 2 Ring-fence capital 1 bad assets Bank assets Plan to purchase toxic assets Fund commercial paper Fund assetbacked securities Ban or restrict shortselling United States x x x x x x x x x Japan x x x x x Euro area x Germany x x x x x France already high x x x Italy x x x United Kingdom x x x x x x x x Canada x x x x Australia x x x x Austria x x x x Belgium x x x x Czech Republic x Denmark x x x x x Finland x x x x x Greece x x x Hungary x x x Iceland x x x x Ireland x x x x x Korea x x Luxembourg x x x Netherlands x x x x x New Zealand x x Norway already high x x Slovak Republic x Poland x x Portugal x x x Sweden x x x x Spain x x x x Mexico x Switzerland x x x x x Turkey Source: OECD Secretariat.