The economic and fiscal outlook for OECD countries Presentation to the Economics and Security Committee of the NATO Parliamentary Assembly 17 February 2010 Sveinbjorn Blondal Head of Macroeconomic Policy Division OECD Economics Department
Outline of presentation 1. The crisis and its legacy 2. The economic outlook for OECD countries 3. Public finances: Outlook and challenges
The crisis and its legacy The crisis in a nutshell Abrupt shift to risk aversion. Collapse in asset prices: equities, private bonds and other private financial assets; subsequently, commercial and residential property. Extreme reluctance of financial institutions to deal with each other: hightened liquidity and solvency problems. Risk of a systemic collapse of the financial system.
The crisis and its legacy The extraordinary policy response Financial policy measures to stabilise the financial system (e.g. capital injections, guarantees). Discretionary fiscal policy easing to support aggregate demand. Monetary policy easing to stimulate aggregate demand and support the financial system: Policy interest rates reduced to close to zero. Unconventional measures to expand liquidity.
The crisis and its leagacy A catastrophic outcome has been avoided Peak-to-trough reduction in GDP
The crisis and its legacy A recovery is underway GDP growth rate (s.a.a.r.) 2008 2009 Q3 Q4 Q1 Q2 Q3 Q4 United States -2.7-5.4-6.4-0.7 2.2 5.7 Euro area -1.6-7.6-10.0-0.4 1.6 0.4 Japan -4.0-11.4-12.3 5.2 0.0 4.6 Source: OECD.
The crisis and its legacy Balance sheets under pressure Banks and other financial institutions: too little capital relative to total assets. Households: sharp reduction in their assets relative to income. Non-financial businesses: Excessive indebtedness. Monetary authorities: Bloated balance sheets. Governments: Very high budget deficits and debt accumulation.
The crisis and its legacy Unemployment has risen significantly in most countries
Economic Outlook OECD Activity is projected to recover modestly from widespread recession Note: Historical data until 2008; EO86 estimate for 2009; projection for 2010 and 2011.
Economic Outlook OECD Unemployment will remain high in the OECD Note: Historical data until 2008; EO86 estimate for 2009; projection for 2010 and 2011.
Economic Outlook OECD Inflation will remain subdued
Economic Outlook OECD Current account imbalances will be smaller in the near future Note: Historical data until 2008; EO86 estimate for 2009; projection for 2010 and 2011.
Public finances: Outlook - challenges Fiscal positions will improve only slowly
Public finances: Outlook - challenges Government debt levels have been pushed to record highs
Public finances: Outlook - challenges Higher government debt tends to raise long-term interest rates Spread between long-term and short-term interest rates versus gross government debt in % of GDP Note: Bars represent average across all OECD countries for which data are available over the period 1994 to 2008. Short-term interest rates are typically rates on 3-month Treasury bills and long-term interest rates those on 10-year government bonds. Source: OECD Economic Outlook 86 database.
Public finances: Outlook - challenges Cumulative consolidation needed to bring fiscal balances to zero in 2017 Per cent of GDP
Public finances: Outlook - challenges Cumulative consolidation needed to bring fiscal balances to zero in 2017 Per cent of total government outlays
The economic and fiscal outlook for OECD countries Presentation to the Economics and Security Committee of the NATO Parliamentary Assembly 17 February 2010 Sveinbjorn Blondal Head of Macroeconomic Policy Division OECD Economics Department