Overview The near-term global economic outlook Paul van den Noord Counsellor to the Chief Economist OECD 1 Overview World growth has slowed, including in EMEs. Trade has weakened. Unemployment is high and rising. US economy still growing but facing Fiscal Cliff Lack of confidence from euro area crisis is taking its toll Adjustment in the euro area is slow and proving costly Loss of momentum may persist Resolving the euro area s banking, fiscal and competitiveness problems is key
Growth projections Interim Assessment The outlook Annualised quarter-on-quarter GDP growth, per cent 1 Q1 1 Q United States. 1. Japan. 1. Germany. 1.1 France.1 -. Italy -. -.9 United Kingdom -1. -1. Canada 1. 1. G 1..9 Euro.1 -. 1 Q 1 Q.. -.. -. -. -.. -.9-1. [-.] 1. 1. 1.9. 1.1-1. -. 1. The forecast does not account for the likely bounce back in activity from Q to Q following the additional Diamond Jubilee bank holiday in June. The impact of the Olympics may also not be fully accounted for in these forecasts.. Weighted average of Germany, France and Italy. Source: OECD Quarterly National Accounts; and OECD Indicator Model forecasts. The outlook is weak Annualised quarter-on-quarter GDP growth, per cent G United States Euro 1 1-1 -1-11Q 11Q 11Q 1Q1 1Q 1Q 1Q - Note: Euro is Germany, France and Italy. Source: OECD Quarterly National Accounts; and OECD Indicator Model forecasts.
World growth Risks to the outlook Risks to the outlook Renewed euro area instability further dampening global confidence. Excessive fiscal contraction, especially in the US. Continued disappointment in labour market outcomes knocking consumer confidence. Further increases to already high oil prices. World growth has slowed markedly Contribution to annualised quarterly world real GDP growth, percentage points 1 1-1 -1 - - OECD Non OECD - - - 9 1 11 1 - Note: Calculated using moving nominal GDP weights, based on national GDP at purchasing power parities. Last observation: Q 1. Source: OECD Quarterly National Accounts.
Unemployment World trade World trade has stopped growing World goods and services trade, annualised q-o-q change, per cent PMI, Global Manufacturing New Export Orders Index (RHS)¹ 1-1 - - - 1 9 1 11 1 Note: 1. Values greater than signify an increase in new export orders. Source: OECD National Accounts database; and Markit Economics Limited. Unemployment is high and in Europe is on the rise 1 11 1 United States Euro area Japan Unemployment rate, percent of labour force 1 11 1 9 9 1 11 1 9 Source: OECD Main Economic Indicators; and Eurostat.
Euro area impact on EMEs Business confidence Business confidence hit by euro crisis (and US fiscal uncertainty) Purchasing Managers Index (PMI) for manufacturing and services United States Euro area Manufacturing Non manufacturing Manufacturing Services 9 1 11 1 9 1 11 1 Note: Values greater than signify an improvement in economic activity. Source: Markit Economics Limited. 9 China s trade impacted by the euro crisis China s exports by destination, year on year growth North America East, S-E and Austral Asia Euro zone 1 1-1 -1 - - - - - 9 1 11 1 - Source: CEIC. 1
Euro crisis tradeoffs Current account balance, per cent of GDP Euro crisis origins Current account balance, per cent of GDP 1 The euro crisis results from a build up of imbalances Unemployment rate and current account balance, AUT NLD FIN DEU - FRA ITA IRL SVK - EST ESP -1 PRT -1 GRC 1 1 1 1 1 Unemployment rate, per cent of labour force Source: OECD Economic Outlook 91 database. 11 Lower CA deficits have come at the cost of higher unemployment in many countries 1 Unemployment rate and current account balance, to 1 AUT NLD FIN DEU - FRA ITA IRL SVK - -1 EST PRT ESP -1 GRC 1 1 1 1 1 Unemployment rate, per cent of labour force Source: OECD Economic Outlook 91 database. 1
Euro area adjustment Unit labour costs 1 1 1 1 Euro area unit labour costs have begun to adjust in some countries Germany Spain France Greece Ireland Italy Portugal Euro area Unit labour cost, = 1 1 1 1 1 11 11 1 1 9 1 9 1 11 9 Source: OECD Economic Outlook 91 database. 1 Euro adjustment must be symmetric Debtor countries (eg Greece, Ireland, Italy, Portugal and Spain): o Wage restraint and fiscal consolidation. o Structural reforms to speed reallocation of resources to export activities and productivity growth. Creditor countries (eg Germany) o Allowing for higher wages and inflation. o Product market reforms to boost consumption and investment in domestically focused services sectors. The political and social challenges would be smoothed with stronger area-wide growth. Alongside the Compact for Growth and Jobs, take decisive action at EU level to deepen the Single Market. 1
Euro area banking capital Euro area feedbacks Three negative feedback loops in the euro area 1. Solvency fears for banks and their sovereigns are feeding on each other due to government guarantees for banks and bank holdings of government bonds.. The possibility of exit from the euro area are pushing up yields, which in turn reinforce break-up fears.. Worries about government debt driving up yields, which further weighs on debt dynamics. 1 More capital is required across European banking system Indicative estimates of additional capital required over mid-1 levels to bring core Tier 1 capital to benchmark of % of total assets, per cent of GDP 1 1 1 1 IRL GRC PRT ITA ESP Total DEU NLD FRA Note: Indicative estimates calculated based on a sample of large euro-area banks scaled up to the size of the total assets of all banks (typically requiring an adjustment ranging from 1. to 1.). Subordinated loan and other hybrid capital is not taken into account. The % benchmark equity ratio is based on the maximum leverage of - times (see Blundell-Wignall and Atkinson, 1). Source: Bloomberg; and OECD. 1
Euro area sovereign spreads Euro area deposits 1 1 1 Greece Ireland Portugal Spain Italy Bank deposits are contracting in some euro area countries Bank deposits, per cent GDP 1 1 1 1 1 1 1 9 1 11 1 Note: Aggregated balance sheet of euro area monetary financial institutions excluding the Eurosystem. Last observation: July 1. Source: Datastream; ECB; and OECD Quarterly National Accounts Database. 1 Some sovereign bond spreads are much higher than fundamentals suggest Sovereign bond spreads compared to benchmarks, basis points over German bonds Expected spread based on historical norms Observed spreads 1 1 1 1 - Spain France Greece Ireland Italy Portugal - Note: Actual spreads were calculated using ten-year benchmark bond yields retrieved from Thomson Reuters Datastream as of September 1. Expected (benchmark) spreads are based on past relationships between yields and debt ratios. Source: OECD calculations. 1
Euro area policy requirements Euro area borrowing costs Monetary transmission is not working in many countries Euro area cost of borrowing, interest rate in per cent 9 Germany France 9 Italy Portugal Spain Ireland 9 1 11 1 Note: New loans to non-financial corporations, up to EUR 1 million, with an agreed maturity up to 1 year. Last observation: June 1. Source: Datastream. 19 A comprehensive solution to the euro crisis is needed Three bouts of good news: OMT, ruling of the German Constitutional Court, Dutch elections. But: The banks need to be strengthened, alongside creation of a banking union. Fiscal consolidation in Europe should continue. Wages and prices need to adjust. Structural reforms are needed to boost productivity, create jobs and help price adjustment.
Euro area policy requirements Features of ECB OMT EMS/EFSF programme or precautionary line a precondition. ECB to judge progress on commitments. Unlimited intervention, no target quantity/yield, to achieve the objective. Buying bonds at 1- year maturity. Interventions are sterilised. ECB accepts equal treatment with private creditors. Reporting on interventions on a weekly/monthly basis. 1